(Bloomberg) -- Chinese equities rose and the yuan jumped past the closely watched 7-per-dollar level for the first time since September, as authorities accelerated a shift toward reopening the economy.
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The onshore yuan surged more than 1% to 6.9678 per dollar, the strongest since Sept. 15, while the Hang Seng China Enterprises Index rallied as much as 4%. Property firms' dollar bonds also rose as financial hub Shanghai and neighboring Hangzhou eased some Covid curbs following recent protests against the nation's stringent policies.
Bullish sentiment toward the world's second-largest economy is rising as officials relax their hardline stance on virus curbs, with abrdn Plc and Wall Street banks saying it's time to return to the nation's markets. Chinese stocks in Hong Kong surged 29% last month, the best performance since late 2003, while the yuan gained by the most since 2018.
The loosening of restrictions, coupled with a property rescue package, has resuscitated Chinese stocks after a $6 trillion rout that culminated in the Communist Party congress in October. Investors are expected to zero in on longer-term plays such as consumer and health-care shares as the economy recovers.
"There are more signs of relaxation of Covid curbs, and the positive factors have not been fully priced in by the market," said Kenny Wen, head of investment strategy at KGI Asia in Hong Kong. "I expect more funds to continue to hold long positions in the remainder of the month for year-end window dressing purposes."
Other Chinese benchmark stock gauges also advanced, with the CSI 300 Index and Shanghai Stock Exchange Composite Index rising more than 1%.
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Morgan Stanley on Sunday lifted Chinese equities to overweight from an equal-weight position it had held since January 2021. Goldman Sachs Group Inc. expects China's stocks to outperform in 2023, while Bank of America Corp. said it has turned tactically positive on the market.
Investors are also weighing the impact of a robust US jobs report as well as expectations for a slowing of aggressive Federal Reserve rate hikes, which have hurt global markets this year.
"We judge recent public protests against the tight Covid curbs have put pressure on the government to hasten its reopening plans," Commonwealth Bank of Australia strategists led by head of international economics Joseph Capurso wrote in a note Monday. "Dollar-yuan can extend its losses this week if there are further signs China is readying to exit its strict Covid policies."
The rally spilled over into the credit market, with traders saying that Chinese property firms' dollar bonds rose at least 3 cents Monday morning. Country Garden's 6.5% dollar bond due 2024 jumped 4.5 cents to 71.9 cents on the dollar as of 9:20 a.m. in Hong Kong, after rallying 9.4 cents on Friday. It's poised to reach the highest since May 30, according to Bloomberg-compiled prices.
China junk dollar notes, dominated by the property sector, rose to an average 65 cents on Friday, the highest in three months, a Bloomberg index showed.
Shanghai joined Beijing, Shenzhen, Guangzhou, Zhengzhou, and other Chinese cities in shifting toward reopening after recent protests. Most places will no longer require PCR results for access to local public transit and many shared spaces.
Covid Zero will probably formally remain until April, though the risk of an earlier but managed exit has increased, according to strategists at Goldman Sachs Group Inc. Mobility is likely to decline sharply before then as case numbers skyrocket, they cautioned.
Some analysts remain cautious, warning that the yuan will only sustain gains if Beijing manages to ensure a solid economic recovery next year. The upcoming December Politburo meeting, which provides high-level guidelines for economic policy-making, is the next key focus for investors.
"While there are positive steps taken, it'll take time for China to exit from their zero Covid policy," said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. "In the near term, China's economy continues to face headwinds from the prolonged property market slump and high Covid infections weigh on consumption recovery. These factors may limit the gains in the yuan."
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Others caution that rising virus cases could amplify swings in share prices.
China's direction of gradual reopening is clear but "cases will surge, confusion will grow, and the market will be volatile," Hao Hong, chief economist at Grow Investment Group, wrote in a note. Rising cases will "likely arouse confusion and thus chaotic expectations and market volatility."
--With assistance from Chester Yung, Matthew Burgess, Lorretta Chen and Dorothy Ma.
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