China's stock frenzy kicks into overdrive with hopes that the worst is over

(Bloomberg) — After nearly two years of disappointment and $6 trillion in losses, Chinese stocks jumped at the fastest pace in the world this week on frenzied speculation that the bottom has finally hit.

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A flurry of market-friendly headlines – along with unverified talk that China is ready to exit its strict Covid Zero policy – led the Hang Seng China Enterprises Index to its best weekly gain since 2015. Led by tech names, the benchmark jumped as much as 8.8% on Friday after Bloomberg News reported progress in efforts to prevent the delisting of hundreds of Chinese stocks from U.S. exchanges.

While all such rallies have failed in recent months, bulls are betting that some of the world’s lowest valuations have left Chinese stocks ready to jump at any hint of good news. The risk is that they may be getting ahead of themselves, especially as the nation’s top health authority reaffirms its commitment to Covid Zero.

“Markets seem to be feeding off any 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. on valuations and that much of the bad news has been baked into these stocks, investor sentiment is more bullish than bearish.”

The wild bounce comes just a week after a historic defeat sparked by concerns about President Xi Jinping’s power grab at a Communist Party congress. And while those losses came after a carefully orchestrated leadership meeting, gains in recent days — after four months of losses for the major indexes — have been driven by rumors of a reopening.

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

Read: How Mysterious China Screenshot Fuels $450 Billion Rally

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

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

Reopening-related stocks such as Li Ning Co. and Haidilao International Holding Ltd., were among the big gainers. China is working on plans to eliminate 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. jumped at least 7% at the close. Dozens of inspectors from the U.S. Public Company Accounting Oversight Board will leave Hong Kong as early as this weekend, ahead of the original mid-November schedule, people familiar with the matter told Bloomberg News, speaking on condition of anonymity because the information is confidential. .

The sudden jump brought out short sellers who had earlier bought contracts to profit from deeper declines in the Hang Seng China Enterprises gauge.

Still, the feel-good mood hasn’t stopped the outflow of foreign funds. There were 5 billion yuan ($687 million) in net sales this week through trade links with Hong Kong, adding to 13 billion yuan last week, according to data compiled by Bloomberg.

“With so much positive talk in the market, the indices are relieved,” said Wheeler Chen, analyst at Forsyth Barr Asia Ltd. “There are so many rumours. Nothing is confirmed, but people are buying on these tips.”

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

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