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HomeMarketBofA Strategists Turn Bullish on China. There Are Some Caveats.

BofA Strategists Turn Bullish on China. There Are Some Caveats.

China unveiled measures that included reducing Covid quarantine requirements for close contacts and inbound travelers.

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Anthony Kwan/Getty Images

After two years of caution, enough good news has emerged that one relatively bearish Asian equity strategist has turned bullish on China—tactically, for now.

The turn comes as Chinese stocks have been bolstered in recent weeks by baby steps toward a pivot away from the Zero-Covid policy that has strangled its economy and contributed to frustration on the ground. There are also expectations of more stimulus after Chinese President Xi Jinping cemented power for a third term. A meeting between Xi and President Joe Biden paved the way for reopening more channels of communication to avoid turning their increasing competition into a global conflict.

iShares MSCI China
exchange-traded fund (MCHI) up 5% on Tuesday, building on 15% rise since last Thursday.

But even the optimists have major caveats. In a note to clients,
Bank of America
strategist Ajay Kapur stressed his long-term concerns about China remain intact. He cited the possible deterioration of return on equity and a rise in equity premium—or the amount investors demand to hold Chinese assets because of growing risks.

Still, Kapur and his team are turning more bullish tactically. One major catalyst: Beijing’s steps toward an exit plan from the zero-Covid policy that has strangled its economy and contributed to frustration on the ground.

At a Politburo meeting last week, Beijing unveiled 20 measures that included reducing quarantine requirements for close contacts and inbound travelers; a call for more efforts to promote vaccine and drug development, and a subtle shift in language to the policy that left out harsher language suppressing questioning of Covid controls, writes Bank of America economist Helen Qiao in a separate note.

China also unveiled a 250 billion renminbi ($35 billion) rescue package to support sales and maintain funding access for property developers to stabilize its ailing property sector and vowed to support private investment in key infrastructure projects.

China’s credit cycle is also revving up, which Kapur sees as putting a floor under earnings per share downgrades and revisions in coming months.

With the MSCI China down 60% since February 2021, others have also said Chinese stocks are primed for a near-term bounce once there is more clarity on an exit plan from zero-Covid and as China bolsters stimulus for its economy in contrast to much of the developed world that is tightening policy to restrain inflation.

In a separate note to clients, Bank of America equity strategist Winnie Wu writes that if more reopening developments spark a year-end rally, investors may need to pivot away from their largely underweight positions in Chinese stocks, creating a self-reinforcing rally that benefits large, liquid and index-heavy stocks.

Caution is warranted though. Covid cases are rising and broad-based lockdowns are still impinging on economic activity in recent weeks. Bank of America’s strategists see a gradual reopening, with sentiment and economic activity likely taking over two to three quarters to recover even if the market moves more quickly. It’s unclear how battered consumers and businesses will respond.

Geopolitics also remains a concern, even as Xi and Biden looked to re-establish channels of dialogue in their meeting this week. One reason, according to Kapur, is the escalation in the U.S.-China technology war with Biden’s far-reaching export controls.

Sentiment toward a tougher stance against China in the U.S. hasn’t softened either. In fact, the House Foreign Affairs Committee Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets is holding a hearing Tuesday, looking at investment in foreign adversaries—essentially China. The focus, according to Beacon Policy Advisors, will be investment through secondary markets, not just outbound investment into high-tech sectors. 

The focus appears to be on increasing transparency through more disclosures, but Beacon analysts also see a bill that would shorten the delisting timeline from the Holding Foreign Companies Accountable Act from three year to two—delisting Chinese companies not in accordance with U.S. disclosures could begin as soon as next year—as having a decent chance of passing in the lame duck session of Congress this year, perhaps attached to the National Defense Authorization Act.

Still unknown is whether the Public Companies Accounting Oversight Board’s auditors were given access to the material they needed on their trip this fall to Hong Kong to avert a delisting of Chinese companies.

Beacon’s analysts also expect increased scrutiny of outbound investments into China, likely through an executive order in coming months rather than legislation. In a briefing about an annual report from the U.S.-China Economic and Security Review Commission on Tuesday, Commissioner Michael Wessel said that “capital flows to China across the board are of enormous concern. Capital and tech are two flows that empower President Xi and his efforts and we need to get a better handle.”

“Biden is saying the right things to try to ease the bilateral tensions, but the White House’s actions suggest a different story, one that we expect to continue as both Republicans and Democrats continue to look for ways to further isolate China,“ Beacon analysts said.

That is one reason a tactical recovery in Chinese stocks may not be the beginning of a longer-term bounce.

Write to Reshma Kapadia at


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