China's stocks could rise 20% once it fully reopens after COVID-zero curbs - but that won't come for months, Goldman Sachs says

• Chinese stocks could jump 20% once the country fully reopens after months of COVID-19 curbs.
• The stock market could react more positively to the easing of local policy, Goldman Sachs said.

Chinese stocks could rise 20% once Beijing drops its zero-COVID restrictions that have hit the economy — but that won't happen until well into next year, strategists at Goldman Sachs have said.

News reports and hints at a policy shift since the Communist Party Congress closed in late October suggest China's authorities may have kickstarted preparations for an eventual relaxation of the curbs, a team led by Kinger Lau said in a note Sunday.

"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) Fed pivot and/or a cessation of the Russia-Ukraine war, in our view," they said.

"We estimate that a full reopening could drive 20% upside for Chinese stocks based on empirical, top-down, and historical sensitivity analyses," the team added.

They noted that stock markets usually react more positively to local policy relaxation than to international reopening.

Speculation that Beijing is about to change its zero-COVID approach have driven gains in Chinese and Hong Kong stock markets in recent days, despite official denials saying the policy is firm, according to SEB analysts.

The Hang Seng Index in Hong Kong closed 2.7% higher on Monday, and has gained 13% in the past five sessions. Meanwhile, the Shanghai Composite moved up 0.23% and is up 6.4% in the same timeframes. On Friday, shares in tech giant Alibaba and other US-listed Chinese stocks also got a boost from investors' hopes for reopening.

Helping fuel the rumors was a report Friday that a former top disease control official in China said the government will make substantial changes to its "dynamic-zero" COVID-19 policy in the coming months.

But the optimism persisted over the weekend, even after health officials in China said the government won't waver in its "dynamic-clearing" approach to COVID-19 cases as soon as they emerge.

China's authorities won't reopen fully until the second quarter of 2023, as they need time to make preparations to drop the lockdowns, widespread testing and quarantines in place, according to a team of Goldman Sachs economists.

"The actual reopening is still months away as elderly vaccination rates remain low and case fatality rates appear high among those unvaccinated, based on Hong Kong official data," a team led by Hui Shan said in a separate note Sunday.

They believe the shift will depend on progress in four areas: a higher elderly vaccination rate, broad accessibility to affordable COVID-19 medicine, changes in government messaging to ease fears about infections, and ensuring there are enough medical resources in place against a major wave of infections.

"Our economists believe that next spring — after the Lunar New Year peak travel rush and next March's Two Sessions when the reshuffling of government officials takes place — may be a plausible time for China to finally exit its zero-Covid policy," the economists said.