How might the stock market react when rumors about China letting go of its zero-COVID policy spread?

The stock market reaction

The whispers of policy change sparked a huge rally of around $450 billion in Chinese equities. The Shanghai Composite Index rose 6.1% and the Shenzhen Composite Index rose 7.6% from the start of the rumor up until November 4th. The Hang Seng Index, which is made up mostly of mainland Chinese firms, increased by more than 10% over the same time frame.

Since then

The Chinese government disappointingly declared its unwavering commitment to the status quo of COVID-19 Zero over the weekend, but the rally continued into the new week. The Shenzhen, Hang Seng and Shanghai indices have all still been rising.

Beijing’s strict containment measures, including lockdowns, quarantines, and mass testing, were “completely correct,” and “the most economical and effective,” according to Hu Xiang, head of the disease prevention and control bureau at the National Health Commission, who spoke at a briefing, as reported by Reuters.

China has steadfastly adhered to a zero-tolerance strategy in its approach to the Covid-19 pandemic, which means that even a single case of infection will often result in lockdowns and widespread testing. These policies have wreaked havoc on the economy and are driving consumers, and the public, to deep resentment. This is in contrast to the majority of the rest of the world, which has mostly abandoned virus limitations and has largely learned to live with it.

Last week, markets soared on the expectation that China would ease its approach. This expectation was fueled by rumors based on an unsubstantiated memo that was passed around on social media that stated China was planning a reopening from severe COVID-19 limitations in March next year.

The path out of zero-COVID may be a long one yet, and however the markets respond to new data, you can take advantage of all market conditions (bullish and bearish) with a trusted and regulated broker such as Easymarkets.

How the rumor started…

Nobody knows for certain who wrote it, or when it was written. However, for the two consecutive days following, investors snapped up equities after seeing only the snapshot of a plan to reopen in China.

A dozen anonymous investors reported seeing the unconfirmed message, which consisted of black characters on a white backdrop and no other identifying information. On Monday night it began circulating in WeChat groups composed of analysts and fund managers. It quickly swept across the country by daybreak.

According to the snapshot, on Sunday, President Xi Jinping requested a meeting of Covid-19 specialists, which was hosted by China’s No. 4 official Wang Huning, one of seven members on the influential Politburo Standing Committee. The meeting was apparently set to discuss ways to reopen in a sustainable way soon next year.

The events of the last week certainly show that investors have been waiting patiently to jump on any incentive to buy. Chinese equities have been among the worst performers worldwide this year due to the country’s economy growing at a rate close to its slowest in four decades, so any positive news might trigger buying waves on the local stock markets (as well as on other major stock exchanges).