China stocks rise on reopening optimism

Chinese companies have strengthened significantly in recent days  after Beijing said the worst in its battle against COVID-19 was over. Reopening hopes boosted demand for Chinese equities in the first three weeks of January. Purchases of Chinese assets by foreign investors exceeded the total volume from 2022:  

• Deputy Prime Minister Liu He, during the WEF meeting in Davos said that China will support the development of a private economy in 2023 and the return to a centrally planned economy is impossible. In addition, Liu He met Janet Yellen in Switzerland, which eased fears regarding potential crisis in diplomatic relations between two nations;

• China said the worst was over in its battle against COVID-19 ahead ahead of the Lunar New Year holidays, which is expected to be the busiest day of travel in years on Friday.

• China's tech stocks recorded a total $700 billion inflows as the Beijing eases regulatory pressures on the sector, attracting the attention of international funds that have fled the market in recent years to avoid risk;

• The Hang Seng Tech Index jumped nearly 60% from its October lows, with combined gains of Alibaba and Tencent shares topping $350 billion, according to Bloomberg. Just a few months ago, Chinese tech stocks were treated as almost 'uninvestable' by foreign investors;

• Majority of global investment funds have not decided to significantly increase their exposure to the Chinese market yet. Although Washington and Beijing conduct a political dialogue, Xi Jinping's policy is still perceived as unpredictable.

Chinese indices launched an upward correction in November 2022. Alibaba and Tencent are the top performers of the recent rally. Source: Bloomberg, FT

Analysts opinions:

• Goldman Sachs analysts indicate that the easing of regulations, coupled with better results of Chinese tech companies and the reduced risk of delisting from the US provided fuel for the bulls. According to strategists, Beijing will use all means to stimulate economic growth;

• According to CICC strategists, the rally of the Chinese tech sector was driven by hedge funds and covering short positions. This is indicated by the intensity of the last upward wave and the lack of significant improvement of fundamental factors. This opinion is shared by analysts from Goldman Sachs, according to which hedge fund positions have increased significantly since October;

• Some analysts believe that the return to normal economic activity in China will be gradual. Others expect a sharp increase in consumption starting from the beginning of the New Year holiday in China, which will finally take place without disturbances after the exhaustive period of the 'Covid zero' policy. Analysts from Morgan Stanley remain optimistic about Chinese stocks, with an indication of Alibaba (BABA.US). Other noteworthy stock is New Oriental (EDU.US), which rose sharply during yesterday's session.

New Oriental Stock (EDU.US), H4 interval. Source: xStation5

CHNComp launched a massive upward correction in November and is approaching major resistance at 7765 pts, which coincides with 38.2% Fibonacci retracement of the downward wave launched in February 2021. Nevertheless a bearish divergence appeared on the Momentum indicator, therefore a pullback towards key support at 6700 pts cannot be ruled out. Source: xStation5