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By John Cheng
(Bloomberg) — Strategists at Goldman Sachs Group Inc. say a complete China reopening will drive a 20% gain in Chinese equities, citing signs that the government may be starting to prepare for a relaxation of its Covid-Zero policy after a key leadership summit.
An increase in flights and growing adoption of an inhalable vaccine developed by CanSino Biologics Inc. are encouraging news, strategists including Kinger Lau wrote in a note dated Sunday. Goldman economists expect the government to start to relax rules in the second quarter of 2023, the report said.
The report comes after Chinese stocks surged, with the Hang Seng China Enterprises Index on Monday extending a 9% advance last week, as traders jumped on unverified social media posts about reopening plans. The gains have largely held even as health officials reaffirmed their commitment to Covid Zero and daily infections jumped to the highest in more than six months.
The removal of Covid restrictions could be “one of the most visible, long-awaited, and powerful upside catalysts for the market,” the Goldman analysts wrote. This assumes that conditions such as higher elderly vaccination rates, changes in official communications to alleviate fears of infections, they said.
The market will pre-trade any actual reopening about a month in advance, and the positive momentum may last for two to three months, the Goldman strategists wrote. Domestic cyclicals and consumer sectors will be the major beneficiaries, they said.
A Goldman basket of reopening stocks — retailers, airlines, hotels and restaurants — has outperformed the MSCI China Index by 20% since July. There’s still “ample room for further valuation and fundamental recovery” if reopening momentum gathers pace, they wrote.
While cadres from the National Health Commission said Saturday China will “unswervingly” adhere to its virus controls given increasingly serious outbreaks, analysts have also pointed that an official at the same briefing said some cities should correct excessive measures. German Chancellor Olaf Scholz’s announcement that China will make BioNTech SE’s Covid-19 vaccine available to foreigners living in the country have also fanned expectations that Beijing is preparing for a reopening.
Last week, the Hang Seng China Enterprises Index capped its best weekly gain since 2015. The CSI 300 Index, the benchmark for mainland stocks, also jumped more than 6%, though it traded 0.4% lower on Monday.Â
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