Is the rally in Hong Kong and China shares now irrational? The health authorities in China rammed home over the weekend that there is no change in China's fervid zero-Covid policy. Yet Hong Kong and mainland stocks continue to advance based on rumors that a change in policy is in the works.
Hong Kong stocks were again the biggest movers in Asia on Monday, with the benchmark Hang Seng Index closing on a gain of 2.7% after it was up as much as 4.1% during the day. In mainland China, the CSI 300 has been less raucous but rose 0.2% today.
Hong Hao, an economist with the hedge fund Grow Investment Group, said on Monday that he believes there's a lot of short covering in Hong Kong. The Hang Seng has surged 13% since the close a week ago.
"Last week's epic rally started around the nadir seen in first Covid outbreak in 2020. But we're so much better now," he said in a post on Twitter today. "Both U.S. and Chinese growth assets victim to a growth slump."
China's markets have added an estimated US$1 trillion in market capitalization since speculation started to surge that the Chinese government will ease the zero-Covid policy. Hong was among the financial analysts who shared the post that started the rally, as I explained a week ago, suggesting Beijing has formed a "reopening committee" working toward an easing of the Covid policy by March.
Because the Chinese Communist Party has no public discussion of policies-in-the-making, such speculation about the functioning of the cogs of power is rampant. Though the rumor about Covid easing is thinly sourced, it's plausible. The next major Communist Party meeting will be in March, when the leadership changes now under way will wrap up, and the premier typically gives an economic forecast for the year.
There has been some progress already. China has eased the rules on international flights. Most notably, German Chancellor Olaf Scholz met with Chinese President Xi Jinping in Beijing on Friday and Scholz said China will allow the mRNA Covid vaccine from the German company BioNTech (BNTX) for use among expatriates.
It would be the first non-Chinese Covid vaccine to be approved for use in China, even if only for non-Chinese citizens. BioNTech, which works with Pfizer (PFE) on the vaccine outside China, has a deal with Shanghai Fosun Pharmaceutical (HK:2196) for use in China. But so far, the vaccine is available in Hong Kong, Macau and Taiwan but not mainland China.
Despite Scholz's statement, there was no coverage of any use of the BioNTech vaccine in the Chinese state media. Fosun Pharma shares fell 4.5% today in Hong Kong after rising 11% while Scholz was in town.
Going against the flow
While there has been tweaking of the Covid rules, the fact remains that they are very stringent, and quite honestly ridiculously complicated. It was refreshing for me to travel to Europe this summer and encounter almost no anti-Covid rules anymore. You can wear a mask if you want and it may be "mandatory" on public transport, but other than that everyone got on with life.
Life continues to be heavily disrupted in China and in Hong Kong. Foxconn Technology ( (HNHPF) and TW:2354), the largest assembler of iPhones for Apple (AAPL) , has been hit by a Covid outbreak that has disrupted its operations in Zhengzhou, the world's biggest single iPhone production center. Capacity utilization in Zhengzhou is running around 70%, according to market tracker TrendForce. Foxconn on Monday started offering a C¥500 (US$69) bonus for workers who return, and is due to report third-quarter earnings on Thursday, but is lowering its fourth-quarter forecast.
There has been a back-and-forth about whether the company would allow workers to leave. It kind of did, but stopped those who wanted to keep their jobs from leaving the premises. The local government is forcing anyone who departs to take official transport and isolate when they get home, so workers climbed the fences to escape and make their own way out.
China on Sunday reported its highest level of daily new Covid cases in six months, at 5,643. The China National Health Commission said at a news conference that there is no change in China's policy of "dynamic clearing" of cases as soon as they appear. Spokespersons Hu Xiang, asked if there's a pending change in policy, said instead that China's zero-Covid measures are "completely correct," according to Reuters.
One interesting development at the same news conference is that another health official, Tuo Jia, called out some local governments by name for misapplying Covid rules. Tuo noted "improper practices" in places such as Heilongjiang, Henan, Guangdong and Shanxi provinces, and the cities of Bijie, Nanchong and Zhengzhou.
Hong, the market commentator, notes that some pro-Beijing influencers have also started making critical comments online about how the Covid policies are applied in a handful of locations. Those comments haven't been censored. It's a rare admission that zero-Covid isn't foolproof and is unpopular.
Today's trading, though, comes as short-sales volume declines from an all-time high in Hong Kong. This short covering could sustain momentum because it lags index increases by one to two months, Hong notes. But he said turnover is relatively low in Hong Kong. Together with the change of direction in shorting, these are "signs of the market in its treacherous bottoming process," Hong says.
Signs of stock life
In Hong Kong trading on Monday, domestic plays such as property developers, beaten up as the housing industry has entered a tailspin, popped. Country Garden ( (CTRYY) and HK:2007), China's biggest home developer by sales, was the Hang Seng's top performer, up 11%. Its property management arm CG Services (HK:6098), the top performer last Friday, added another 9.6%. Optical instruments maker Sunny Optical Technology ( (SOGTY) and HK:2382) added 11.0%.
The Hang Seng Tech Index did hold on to a 4.1% gain at the close. Out-of-favor China-only plays, often off-limits to U.S. investors, were the top beneficiaries. Facial recognition systems maker SenseTime (HK:0020), now essentially a penny stock and subject to U.S. sanctions, added an eye-popping 35%. The chip foundry Hua Hong Semiconductor (HK:1347) was the second-best performer, up nearly 17%. It will be hit by new U.S. rules limiting the export of chip technology to Chinese companies.
In terms of Wall Street-listed China plays, the live-streaming and mobile games maker Bilibili ( (BILI) and HK:9626) was the top performer, up 9.3%. The data center developer GDS Holdings ( (GDS) and HK:9698) rose 9.1%.
Traders were less ebullient about the megacaps that often lead the way. Baidu ( (BIDU) and HK:9888) climbed 3.9%, with JD.com ( (JD) and HK:9618) up 3.1% and Tencent Holdings ( (TCTZF) and HK:0700) advancing 2.9%. Alibaba Group Holdings ( (BABA) and HK:9988) actually slipped 0.3%, but that's after it added 11% on Friday.
Can this rally be sustained? Only if there is meaningful easing of the Covid rules. But that's unlikely because Chinese-made vaccines don't work very well, there's little domestic immunity to Covid, and the health system would be overwhelmed by a major Covid outbreak.
When the rules aren't the rules
The truth is that Hong Kong and Chinese officials stick to really tough anti-Covid measure when it suits them. The application of the rules has been abused to prevent protests from occurring in both China and Hong Kong. Mainland local officials, who risk their jobs if they allow outbreaks in their city or neighborhood, interpret the proscriptions in different ways.
Hong Kong was banning mask-wearing at the outset of the pandemic after pro-democracy demonstrators took to wearing masks during protests in 2019. The administration has used the rules against gatherings to prevent the Tiananmen Square massacre vigils from taking place for the last three years. It removed mandatory hotel quarantine for all arrivals only at the end of September because the city was due to host a major financial conference, followed by the Hong Kong Sevens rugby tournament.
Several senior Hong Kong officials appeared without masks on at the rugby tournament, contrary to public health rules. Hong Kong Chief Executive John Lee Ka-chiu was barefaced as he presented the trophy to the winners, Australia, which defeated Fiji in the final.
Security Secretary and former police chief Chris Tang Ping-keung was booed as he made his way into the stands with a security detail, with some fans shouting "Wear a mask!" The secretaries for justice, commerce, tourism and housing all took their place in the stands, typically without wearing masks.
Most egregious of all, Finance Secretary Paul Chan Mo-po also attended the rugby tournament without a mask on. Chan tested positive for Covid the week before last while in Saudi Arabia, but was allowed back into Hong Kong without quarantine despite testing positive for the virus on his arrival back home. Regular folks receive no such special treatment.
The authorities explained that he was asymptomatic and his "cycle threshold" reading was high enough that he was considered a "recovered case." The "Ct" value is one of the current obsessions in the Hong Kong testing system, representing the number of times a PCR test must be run to detect Covid-19. Tests are normally "negative" after 37-40 cycles, and Hong Kong will accept a Ct reading of 33 as a "recovered" case.
Chan was one of a lucky few with the right Ct score, the government says, though it didn't release his score. And he proceeded to traipse around town, something other arrivals can't do.
Hong Kong currently requires three days of self-observation for overseas arrivals, during which time you're not allowed in public venues. Indeed, several South African fans who flew into town specifically to watch the rugby tournament were denied entry to the venue on Friday because they hadn't sat out those three days.
Yet Chan was approved to give an address to a financial conference in Hong Kong last week, the day after his arrival and repeat positive Covid tests. Then he showed up at the rugby tournament. The rules on Covid apply in China until they don't.
Hong Kong does have a far easier system of movement than the mainland. It has also seen 2 million Covid cases, at a conservative estimate, in a city of 7.3 million. It's time to scrap mandatory masks and Ct scores and all the unnecessary Covid rigmarole. In mainland China, the economy will function when companies can get production back to full effect. Zero-Covid is here on the mainland for some time yet to come.