In a recent note (The mountains are high..) we noted that:

“China has a tendency to ‘test’ new policies on certain regions before going ‘nationwide’ with them. Thus, it is entirely possible for, say, the Greater Bay Area, including Hong Kong, to see an earlier easing of Covid restrictions than other parts of the country. Indeed, watching the recent spike in the prices of Macau casino stocks, the locals are clearly looking at things this way.”

As such, we were more than a little pleased to see that the authorities in the Hong Kong SAR have indeed announced some new reductions to the restrictions to travel, in particular in lifting the 0+3 limitations to visit bars and restaurants that, among other things, were limiting the ability of international investors to include Hong Kong SAR as part of a broader Asia business trip (admitted self interest here!). While some limited restrictions still remain, the direction of travel is clear and likely that a lot of focus will now be for full opening up to China for Chinese New Year (something Hong Kong SAR CEO John Lee has declared as something “I will do everything I can to facilitate”).

Of course, the HSI has also been rallying since the end of October, helped in particular by the rebound to the China Internet stocks that were linked to the ADR capitulation – many of the stocks had listed on the HSI and thus had acted as a drag on the performance of the index as the ADRs were dumped by US investors (see Is US tax driving Chinese stocks?). Having hit a 13 year low at the end of October, the end of US selling combined with increasing confidence of China opening has helped boost the HSI by over 30%, before hitting some profit taking in the last few days – the latter probably a lot to do with the old concept of it being better to travel than arrive, with investors waiting to see some more clarity on China re-opening. Something that is now a bit more visible.

We re-iterate that we believe that China opening up fully will be one of the big stories of 2023, with a boost to domestic consumption plays and areas involved in trade and tourism, plus a likely second round of ‘temporary inflation’ as increased demand hits existing supply of industrial metals and other commodities.

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