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China’s stock frenzy turns to hopes that the worst is over

(Bloomberg) — After nearly two years of disappointment and $6 trillion in losses, speculation that a bottom in Chinese stocks has finally arrived fueled a worldwide rally this week.

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A flurry of market-friendly headlines — along with unconfirmed talk that China is ready to exit its strict Covid Zero policy — propelled the Hang Seng China Enterprises Index to its best weekly gains since 2015. Led by technical names, the gauge rose as much as 8 .8% on Friday, as Bloomberg News reported progress in efforts to prevent the delisting of hundreds of Chinese stocks from US exchanges.

Although similar rallies have struck in recent months, bulls are betting that some of the world̵[ads1]7;s lowest valuations have left Chinese shares poised to rise on any hint of good news. The risk is that they could come to the fore, especially after the country’s highest health body confirmed its commitment to Covid Zero.

“It appears that the markets are very keen on positive news – whether big or small – as a potential catalyst for Chinese stocks,” said David Chao, global market strategist for Asia Pacific ex-Japan at Invesco Ltd. “Based on the valuations and the fact that a lot of the bad news has been baked into these stocks, investor sentiment is more to the upside than the downside.”

The wild rally comes just one week after a historic breakout sparked by concerns about President Xi Jinping’s rise to power at the Communist Party Congress. And while those losses came after a carefully orchestrated leadership summit, gains in recent days — after four months of losses for major indexes — were led by a trickle of reopening rumors.

“Short squeeze-driven rebounds tend to be short-lived, and many foreign investors are still looking to sell because they are unsure about the outlook,” said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth Management. “For investors who don’t mind volatility, the reopening and spending plays make sense, but you have to be able to tolerate risk.”

Read: How a mysterious China screenshot sparked a $450 billion rally

Hong Kong’s Hang Seng index, down nearly 9% this week, posted its best gains since 2011. The CSI 300 index, the benchmark for mainland stocks, also rose more than 3% on Friday. The Nasdaq Golden Dragon China index of US-listed Chinese stocks has also risen 7.5% in the first four days of trading.

Optimism spread to currency and commodity markets, with the offshore yuan rising more than 1% at one point, while iron ore futures rose. Dollar bonds from Chinese technology firms had also sold off in recent weeks, but their spreads tightened by about 10 basis points on Friday, according to credit traders.

Stocks related to reopening, such as Li Ning Co. and Haidilao International Holding Ltd., were among the big winners in the market. China is working on plans to scrap a system that penalizes airlines for bringing virus cases into the country, Bloomberg News also reported.

Internet giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd. rose by at least 7% each at the close. Dozens of U.S. public company audit inspectors are set to leave Hong Kong as soon as this weekend, earlier than originally scheduled in mid-November, people familiar with the matter told Bloomberg News, asking not to be identified because the information is private.

The sudden rise has caught short sellers, who had previously bought contracts to profit from deeper falls in the Hang Seng China Enterprises gauge.

Nevertheless, the feel-good atmosphere has not stopped an exodus of foreign funds. There were 5 billion yuan ($687 million) in net turnover this week through trade links with Hong Kong, up from 13 billion yuan last week, according to data compiled by Bloomberg.

“With so many positive chatters in the market, the indices have a relief rally,” said Willer Chen, analyst at Forsyth Barr Asia Ltd. “There are so many rumors. Nothing is confirmed, but people buy into these tips.”

–With assistance from Abhishek Vishnoi, Dorothy Chan, Charlotte Yang and John Cheng.

©2022 Bloomberg LP

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