Chinese yuan crosses 7, stocks rally on reopening hopes

© Reuters.

By Ambar Warrick

Investing.com-- The Chinese yuan strengthened past key levels against the dollar, while local stocks rallied sharply on Monday as more cities scaled back anti-COVID measures, drumming up hopes for a broader reversal of the country’s strict zero-COVID policy.

The yuan jumped 0.7% to 6.9756 against the dollar, coming below the 7 mark for the first time since mid-September. The offshore yuan also surged 0.7% to 6.9672, its strongest level in 2-½ months.

Several Chinese cities, including economic hubs Beijing and Shanghai, relaxed movement and testing mandates over the weekend, amid growing public ire towards COVID-related restrictions.

A Reuters report also suggested that China is considering a nationwide pullback of COVID restrictions, citing slowing economic growth and stronger vaccination numbers.

The news drove up hopes that an easing of restrictions will help spur a recovery in the Chinese economy, which was driven close to contraction territory by continued COVID-linked disruptions.

Data on Monday showed that business activity contracted for a third consecutive month in November.

Still, China’s blue-chip Shanghai Shenzhen CSI 300 index jumped 1.6%, while the Shanghai Composite index rallied 1.4% to its highest level since mid-September. Hong Kong stocks logged even stronger gains, with the Hang Seng index up 3.6% to a 2-½ month high.

The Hang Seng has now confirmed a bull market after rallying more than 20% from a 13-year low hit in October. Hong Kong had begun scaling back anti-COVID measures slightly ahead of China, given that the city had a much smaller infection rate.

But while Chinese cities are relaxing some anti-COVID measures, the country still faces a record-high daily increase in infections - a trend that could delay a full reopening.

Analysts warned that rising cases could spur near-term volatility in markets, especially if the government signals a delay in its reopening plans.

“As China reopens, cases will rise, confusion will grow, and the market will be volatile. That said, both on/offshore indices are making a historic comeback at a dizzying speed, and we are staying the course,” Hao Hong, Chief Economist at Grow Investment Group wrote in a note.

Hong was also among the first analysts to call for a potential Chinese reopening. He forecast further weakness in the U.S. dollar, which could benefit Chinese markets in the coming years.