China's Reopening Could Drive Stocks Up 20%

Published on10 NOV 2022

The potential relaxation of China’s zero-COVID policy is poised to boost the country’s equity markets: A full reopening of the country could drive a 20% increase in Chinese stocks as restrictions are lifted, potentially adding $2.6 trillion to the equity market, according to Kinger Lau, Goldman Sachs’ chief China equity strategist in macro research.

“China reopening could be one of the most visible, long-awaited, and powerful upside catalysts for the market,” aside from the possibility of a dovish pivot by the U.S. central bank or a cessation of the Russia-Ukraine war, Lau wrote in a research report. Companies that sell discretionary goods to the local population (domestic cyclicals) and consumer sectors tend to outperform when the COVID policies are relaxed. “Equity markets usually react more positively to local policy relaxation than to international reopening,” he wrote.

China may reopen in the spring, although that path is far from certain. Chinese equities could fall by 15% if reopening is delayed or doesn’t materialize, according to Goldman Sachs Research.
China’s stringent zero-COVID policy has seemingly been effective at keeping the virus at bay. The number of COVID cases in the country has averaged up to 20 per million people per day and less than 1 per million people per day since 2020, which is significantly lower than the average levels of the U.S. and the U.K. of around 200-400 per million people per day during that period. The reported death rates in China are among the lowest globally, at 0.1% compared with the worldwide average of 0.3%.

However, China’s containment of COVID deteriorated when the highly infectious omicron variant emerged, leading to significant disruption to economic activity, including strict lockdowns across financial hubs like Shanghai.

That interference has intensified recently, and Chinese cities responsible for 50% of economic activity are already subject to some form of restrictions, according to GS Research. Moreover, Chinese exports reportedly contracted in October for the first time since the early stages of the pandemic. Our economists estimate that COVID-related restrictions have reduced Chinese gross domestic product output by around 4-5% from its trend levels.
But there are signs that some COVID restrictions could be lifted, particularly since the country’s 20th National Party Congress last month, which point to an eventual reopening of China, Lau says. For one thing, the BioNTech COVID vaccination was recently given approval for expats across the country after German Chancellor Olaf Scholz met with China’s President Xi Jinping. The development of an inhalable could also be rolled out to more provinces across China. And the scheduling of high-profile future international events, such as the Formula One race in Shanghai, and the expected increase in the number of international flights suggest that authorities could be considering relaxing quarantine requirements for travelers.

Certain conditions will have to be met before authorities are likely to relax restrictions: those include a significantly higher vaccination rate for the elderly, broader accessibility to affordable and effective COVID pills, improvements in communication around COVID and the availability of sufficient medical resources to combat new waves of infection. If those factors fall into place, GS Research economists expect a reopening could begin in the second quarter of 2023.

Explore More Insights