China reopening, fact or fiction?

• The Hang Seng is up 20% this month.
• The S&P / ASX 200 is up 10% this month.
• Reports of China reopening buoy Australian resources and equities. Are the gains sustainable?

Reports of China reopening

There is no official statement from China regarding the relaxation of COVID restrictions. Despite this, some market watchers and participants are anticipating a relaxation in some of the tightest and longest restrictions in the world.

On November third Bloomberg quoted China’s top health body as saying that the zero-tolerance approach would be maintained for the foreseeable future.

On the fourth of November, Reuters quoted an ex-government official saying material changes to the current approach in the coming months are possible.

On the tenth of November, Goldman Sachs reported that a reopening could lift stocks as much as 20%, suggesting that a spring reopening in 2023 is possible. However, if the reopening doesn’t materialise, there could be a 15% fall.

Hong Kong has already lifted many of its restrictions, and we may need to wait some time for the central committees to assess the results of this phase before a broader mainland unlocking.

China’s Retail Sales

China’s retail sales figures that measure the total receipts of the retailed consumed goods in the country were published on Tuesday. It declined by 0.5% from one year ago; the market expected a rise of 1%.

The trend over the last year is slightly negative, reflecting the economically negative impact of the current COVID restrictions on movement and consumption.

Asian markets impact

The market shook off this negative data print and trend. In fact, the Hang Seng and Shanghai benchmarks rallied slightly on Tuesday morning.

Hong Kong’s Hang Seng is up over 20% this month, and Shanghai’s composite is up over 7%.

The dour retail outlook in China perhaps implies that the central committee will be forced to reopen, irrespective of the health outcomes, to provide some respite for the economy. Certainly, the leading stock indicators are of that opinion.

Iron ore has similar ideas. Prompt delivery of iron ore to China is capturing prices 17% high than at the end of October.

Australian markets impact

Australian equity in the resource sector has significantly benefitted from the promise of the great reopening. Iron ore producers BHP Billion ASX:BHP (BHP) being up 18% in November, Fortescue Metals Group ASX:FMG (FMG) rallied 30% over the same period.

The broader S&P / ASX 200 index is up by over 10%, having been carried by the resource sector as financials have trended sideways and technology has lowered.

Sustainability of the rally

Wording out of the Chinese government is often nuanced and rarely absolute. Future actions are implied and suggested rather than stated.

Bloomberg reported on the 10^th of November that the top Chinese leaders had expressed the need to stick to the lockdown policy while also being more targeted in their restrictions.

This sort of doublespeak allows a reversal in the course while simultaneously opening the door to new foreign investment that anticipates the reopening.

One can infer that the leaders believe the October selloffs in Hong Kong and Shanghai equity were overdone, and attempts are being made to reattract capital while executing a data-driven and staggered approach to reopening. The approach is to leave the door open to more clampdowns if the medical situation doesn’t progress as planned.

Broader implications for stocks at home and abroad

For the investor in Australian resources, the implication is clear that the recent stock rallies have already captured an anticipated spring 2023 reopening.

Further stock gains will likely be muted until concrete evidence is that the Hong Kong and wider China policy relaxation has successfully achieved the dual objective of increased population movement and only a moderate increase in hospitalisations.