China is the alternative

China is the alternative. That’s the line being spun on Wall Street this morning. If the rumours are to be believed China will continue the process of opening back up and learning to live with Covid. The rumours have sent China and Hong Kong stocks soaring overnight. The Hong Kong 50 is now up by over 11% from the lows:

Usually, where there’s smoke, there’s fire, and there have certainly been plenty of smoke signals out of China this week. Repeated rumours about an easing of social restrictions along with reports that the international flight suspensions could soon end are all boosting sentiment.

Perhaps even to extremes. In the low-interest rate era, TINA was popularised, an acronym for There Is No Alternative (to stocks). After all, why own bonds when they yield little, or even offer negative yields in some cases.

Now, you can get a juicy 4% plus on US bonds across the curve and TINA has been declared defunct. Bonds Are The Alternative. Which is why China Is The Alternative is an interesting new angle. It still remains to be seen just how business-friendly the new CCP regime will turn out to be.

Remember, a big part of the selloff at the end of October was attributed to stockholders passing judgement on Xi Jinping’s concentration of power. Apparently, that’s all forgotten two weeks later. Markets can have very short memories sometimes.

While rumours swirl that the process of reopening is underway, could this simply be a gradual change? Former China government expert Zeng Guang told a conference on Frida that many new COVID policies will be introduced over the next 5-6 months, adding that a "substantive change" to COVID policy is coming soon. It’s unclear what these remarks are based on.

Still, markets rarely wait around for confirmation. Chinese mainland shares have rallied too, and perhaps it’s not all about Covid Zero:

Bloomberg reported that US audit inspectors had finished their on-site China work ahead of schedule, which raises hopes that the delisting risks have been avoided for now. In 2020, US Congress passed the Holding Foreign Companies Accountable Act (HFCAA). If American inspectors can’t review the company audits for three consecutive years, their shares can be banned from trading on US exchanges.

However, it pays to be cautious. If the recent rally is based on these factors, then it’s fair to ask if hope is the driver. If auditors don’t like what they find or couldn't complete their work properly, the delisting risk remains.

Likewise, the reopening. It’s all rumours so far. No active Chinese official has confirmed any new approach.

The fundamentals are unchanged too. The property sector continues to flounder, and the Chinese economy is slowing. Reopening begins to make sense as society adapts to the virus, but whether this creates a good environment for companies and their share prices to flourish remains to be seen.

From a global perspective, what will the impact on inflation be? With China’s economy ramping up again, this could drive demand for energy and push prices up once again. Brent crude recently touched $97 per barrel…