(Bloomberg) — US-listed Chinese stocks wiped out their monthly losses, as an easing of lockdown measures in major cities and better-than-expected economic data helped spur a recovery in the second half of May.
With a 3.7% climb on Tuesday, the Nasdaq Golden Dragon China Index capped its first monthly gain since October. Shares of e-commerce giant Alibaba Group Holding Ltd. rose 2.8%, while large-cap Chinese internet stocks JD.com Inc. advanced 4.6% and Baidu Inc. inched up 0.9%. Electric carmakers also rose, with Nio Inc. up 5.0% after China announced a 50% cut in the purchase tax for low-emission passenger vehicles.
With daily coronavirus cases falling below 100 for the first time since March, China is letting up some restriction measures. Shanghai will resume public transportation from Wednesday after being in a lockdown for two months, and Beijing is allowing some shopping centers to reopen.
Shanghai Covid Cases Continue to Fall as Locals Cheer Reopening
The news flow out of China “remains bullish”, according to Adam Crisafulli, the founder of Vial Knowledge. “While ‘zero-tolerance’ will keep China lockdown risks elevated, it seems like the government will be forced to subtly soften its adherence to this policy given the economic destruction of the last few months,” he wrote in a note.
While China’s factory and services sectors are still in a contraction, official manufacturing and non-manufacturing purchasing managers indexes improved in May, suggesting the hit from Shanghai’s lockdown may be nearing an end. Both metrics beat consensus estimates in a Bloomberg survey.
Still, production remains impacted for a number of companies — with Tesla Inc. and Volkswagen AG said to be keeping workers in factory “bubbles” established during the lockdown — and the threat of new restrictions persists as long as China continues to follow its stringent Covid Zero policy.
Why China Is Sticking With Its Covid Zero Strategy: QuickTake
“The improvement of China PMIs echoed the bottoming out of high-frequency macro data since mid-May, suggesting that the worst of the Covid disruption on China’s growth could have passed,” said Jeffrey Zhang, a Hong Kong-based emerging market strategist at Credit Agricole SA. “Better sentiment in the manufacturing sector should partially ease concerns of China’s logistics and production disruption, and bode well for the recovery of its value-chain partners.”
While the Nasdaq Golden Dragon Index is still down 23% year to date, its recent rebound led the gauge to climb above its 50-day moving average on Tuesday. The group is now facing a key test whether the rally could sustain and meaningfully top that key resistance level.
What may help is the optimism returning to beaten-down Chinese stocks, with asset manager Amundi among the latest to turn more bullish on the group. Better-than-expected earnings from heavyweights including Alibaba and Pinduoduo Inc. are also propping up the sector, as companies trim losses and become more disciplined, according to Jian Shi Cortesi, a portfolio manager at GAM Investment Management.
“There were too many factors lumped together, resulting in extreme bearishness toward China equities, in particular, these ADRs,” she said. “If the bad news just stops, the market can rally.”
(Updates with background in paragraphs 5, 6)
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