Xi’s Covid Shift and the HK50

China is moving towards reducing its anti-covid restrictions, though officially, the government still aims for zero-covid. What happens now?

It's about the tone

Over the weekend, China's President Xi changed the rhetoric to address the covid pandemic. He talked about how the omicron variant was less lethal, a sign of a policy shift in China. China has a relatively low vaccination rate, using only domestically produced viral vector vaccines, unlike the mRNA vaccines used in the West.

Over the last few days, over 20 cities, including major economic hubs like Shenzhen and Shanghai and the capital Beijing, have scrapped many requirements, such as negative covid tests to use public transport. Some infected residents are allowed to quarantine at home. But other measures remain in places, such as local authorities having the power to issue mass lockdowns and closing businesses. What has changed is different from the official policy or the powers of authorities to impose restrictions; instead, they are choosing not to apply the guidelines as strictly.

Relieving uncertainty

While there was a surge in optimism about the changes, uncertainty remains. No official has said that lockdowns and mass testing are over, so investors might worry the rules can come back anytime. The change in stance is seen as political, as it came after the largest protests in decades, which means that politics can drive another change in stance, which is hard for markets to predict.

Lockdowns have had an important impact on the domestic economy and global trade. What gets less coverage is that transit restrictions between cities in town substantially hamper logistics, making it hard to get goods to ports for export. Apple supplier Foxconn is reportedly unable to meet the demand for iPhone production, weighing on the tech firm's stock, and now the company is looking to move production to India. Short-term relief over the change in restrictions leaves a lingering concern over when the policy will officially end, and firms can expect to receive shipments without interruptions.

HK 50 breaks neckline

The Hong Kong 50 index has printed an inverse head-and-shoulders pattern, with the neckline height opening the door to 22500 (R3) next in the event 21k (R2) gives in. The ceiling at 20k (R1) will be a significant capture for bulls unless the stronghold offers a reversal instead. Losing the right shoulder at the 17k (S1) might invalidate the pattern and clear the path towards the low of 14580 (S3), contingent on the 15900 (S2) breakout. In the shorter term, 18500 (s) might change the tide for bulls.

Key takeaways

Several Chinese cities have scrapped many covid guidelines despite rhetoric from the government. The stance is seen as political as it followed the largest protests in decades. While the move has boosted optimism, uncertainty remains as no official has said that lockdowns and mass testing are over. This makes it hard to predict the markets as there are concerns over when the policy will officially end and whether lockdowns impact logistics.