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Can the Hang Seng extend its re-opening recovery?

As China’s rapid relaxation of its Covid Zero strategy continues, the recent market changes have caught analysts by surprise, however, the key question is: can the recovery be extended and what can we expect from the Hang Seng?

Source: Bloomberg

China’s rapid and dramatic relaxation of its long-stated Covid Zero strategy in recent weeks has caught many by surprise.

The most significant is the ten easing measures announced last week that include dropping PCR tests for internal public transport and air travel. Along with home quarantines and an accelerated vaccination rollout for the elderly, the measures announced have effectively reopened the mainland economy.

Local observers report that international border controls are also being relaxed, adding to the positive story around Chinese facing equities. However, before getting too carried away, it would be prudent to warn that tomorrow, another round of dire Chinese activity data is set to be released.

What is excpected?

Industrial Production and Retail Sales are expected to fall in November, and Fixed Asset investment is expected to print flat. All of this points to growth in the Chinese economy falling to a sluggish 2.5% (4Q/4Q).

However, from this low base, there is enormous potential for growth to rebound back above 5% in 2023 if the re-opening is managed well. The bulk of next year’s growth rebound will come in the second half of 2023 as the re-opening gains traction.

Having witnessed first-hand the challenges that a pandemic reopening can present, it is understandable that some may prefer to wait on the sidelines and remain underweight in the Hang Seng and other Chinese-facing equity markets.

The peak period for infections is expected around the China New Year in late January. Combined with a low immunity rate and the possibility of an overwhelmed healthcare system, the likelihood of a bumpy re-opening cannot be discounted.

From its October, 14615 low, the Hang Seng index has bounced over 36% to its high today above 20,000 as investors continue to embrace the prospects of an economic re-opening in China aided by the tailwinds of government support for the property sector and monetary stimulus.

The break above the downtrend resistance coming from the July 2021 29,333 high, indicates that the Hang Seng is attempting to extend its move higher towards the next upside target, the June 22,423 high - over 13% away.

Hang Seng daily chart

Source: TradingView

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