As China ends its strict zero-COVID policy, hedge funds are boosting their wagers on Chinese stocks, according to Goldman Sachs and JPMorgan reports acquired by Reuters and based on their clients' exposure.
China announced major changes to its zero-COVID policy at the beginning of December, relaxing guidelines intended to stop the virus's spread. Some investors anticipate that the new strategy will promote economic expansion.
According to experts, the guidelines mark a dramatic departure from China's tight approach of the previous three years, which included mass testing to contain outbreaks as well as strict lockdowns and border closures.
As a result, Chinese equities are regaining favor in global portfolios, with investors adding more than they shorted in eight of the previous ten weeks, according to Goldman Sachs' prime services weekly report.
According to the U.S. investment bank, Chinese shares had the most cumulative four-week net buying since it began collecting the data.
China was "by far the most net bought market on the prime book this week," Goldman Sachs' report said, based on its clients' flows. "China is quickly becoming a consensus long idea, in our view."
As of Jan. 19, shares of Chinese businesses made up 13.1% of the worldwide net exposure of funds tracked by Goldman Sachs, up from 7.1% at the end of October but still below the record level of 15.3% in July 2020.
Since 2023 began, the MSCI China index has increased by 13.55 percent.
In the JP Morgan Positioning Intelligence analysis, obtained by Reuters, analysts at JPMorgan, who also see hedge funds adding Chinese stocks to portfolios, cautioned that some of the positive momentum may ebb in the near term, depending on further developments on China's reopening steps.
If the China reopening scenario picks up steam and we see increasing involvement from all types of investors, the surge may be able to continue.
The reopening of China comes after protests in a number of cities over the severe lockdowns. These prompted some localities to relax testing and movement limitations, but the new recommendations go far further.
The government has not declared the purpose of the new strategy, which observers believe may cause uncertainty. However, experts claim that several aspects of the new guidelines are imprecise and susceptible to interpretation by local governments, such as when and where people should be tested during an outbreak, what constitutes high-risk zones, and how to manage them.
According to a report from Reuters earlier this month, hedge funds that invested in undervalued stocks late last year and bet on China's reopening saw big profits.
