The China market’s epic ride higher last week is a harbinger of what could come if the nation makes visible moves away from the zero-Covid policy that has stifled the economy. 

Unverified online posts about China’s reopening helped key stock gauges post their best weekly performance in years and spurred gains in the yuan. Investors joined the buying frenzy after a brutal year, undeterred by increasing lockdowns and even as the nation’s top health body reiterated its commitment to its zero-Covid policy.

“While things are still in the realm of hearsay, the end goal is now in sight,” said Yu Yingbo, a fund manager at Shenzhen Qianhai United Fortune Fund Management. A reopening “is almost at arm’s length”, he said, expecting the trade to gather momentum.

While a Bloomberg News report last Friday (Nov 4) said China is working on plans to scrap a system that penalises airlines for bringing virus cases into the country, much remains uncertain on how and when the economy will reopen. But after months of losses, investors are finding it hard not to position for an eventual exit from pandemic curbs, which would unleash pent-up demand from hundreds of millions and send ripples across markets worldwide.  

Here’s a guide to trading China’s much-hoped-for reopening. 

Retail revival 

A revival of banquets and business events could lift catering services, a plus for distillers Kweichow Moutai and Wuliangye Yibin, and eateries like Haidilao International Holding, which has jumped more than 20 per cent last week alone.  

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Reopening will brighten the outlook for the broader economy, a boon for the consumer staples cohort, such as dairy producer Inner Mongolia Yili Industrial Group and Yihai Kerry Arawana Holdings, one of the largest processors of food products in the country.

To be sure, China’s Covid policy pivot is unlikely to be straightforward, creating volatility as traders pore over covert signs and policy tweaks. Any loosening will be followed by a spike in infections, creating wariness among the public who have been largely insulated from the virus.

“For investors who don’t mind volatility, the reopening and consumption plays make sense but you need to be able to tolerate risk,” said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth Management.

Luxury comeback

Spending could go well beyond household staples to more high-end purchases, boosting China Tourism Group Duty Free Corp, which operates an offshore duty-free complex in Hainan. Its onshore shares have surged 18 per cent last week, trimming the year’s loss to 10 per cent. 

Asia’s contribution to the European luxury sector’s earnings will also get back on track if Chinese tourists return. Kering, which owns the brand Gucci, has suffered from weaker sales in China. 

“A potential easing of Zero-Covid would be a welcome positive for luxury stocks,” Swetha Ramachandran, lead manager of the GAM Luxury Brands fund, said in an e-mail, noting that it would support the return of greater mobility as well as renewed optimism among Chinese consumers.

Travel boom

Airlines may finally see a turnaround if China moves to open up. China Eastern Airlines, Air China, and budget names like Spring Airlines stand to gain.

Shanghai International Airport, one of the busiest air hubs in the nation, and Guangzhou Baiyun International Airport will also benefit, with both firms seeing about 30 per cent gains so far this year.   

Japan’s cosmetics makers such as Shiseido will be among the key beneficiaries of Chinese shoppers. The cohort account for 80-90 per cent of inbound cosmetics sales, according to Jefferies Financial Group.

Vaccine boost 

Covid vaccine makers are under the spotlight as higher vaccination rate is deemed a prerequisite for China’s loosening.   

CanSino Biologics has more than doubled over the past two weeks in Hong Kong as Chinese cities adopted its inhaled vaccine.

Other stocks to watch include Walvax Biotechnology, which is developing a homegrown mRNA booster, and China Meheco, which has a pact to distribute Pfizer’s oral pill. Shanghai Fosun Pharmaceutical is commercialising a local Covid drug. All of them gained by the double digits on the mainland last week.

China will also need to enhance medical facilities for lower-tier cities and upgrade hospital equipments to brace for a possible increase in infections. Potential winners include Jiangsu Hengrui Medicine and Jiangsu Yuyue Medical Equipment & Supply.

Commodities 

As the world’s biggest crude importer and second-largest oil consumer, a recovery in China’s economy will stir up commodity demand and reverberate from Australian miner BHP Group to US-listed copper producer Freeport-McMoRan.

China’s top refiner and top energy producer – China Petroleum & Chemical and PetroChina – are the ones to watch when domestic demand for petrol, diesel and jet fuel recover. 

Yuan support

The yuan has been under pressure this year, weakening more than 10 per cent versus the US dollar as the People’s Bank of China kept monetary policy accommodative in divergence with the Federal Reserve.  

Morgan Stanley expects the yuan to strengthen should China eases its zero-Covid policy, given better growth prospects and equity inflows. Looking ahead, the implication could be mixed with potential outflows from the services sector on outbound travel, the strategists wrote last week. 

“China is an area where we are accumulating,” Subash Pillai, regional head of client investment solutions for Asia Pacific at Franklin Templeton Investment Solutions, said last week. “On a 12-month view, we are pretty confident that China will be reopening in some material way.”  BLOOMBERG