Why Chinese stocks jumped on Tuesday

Rumors of China's end to its zero-COVID policy in 2023 were enough to get investors excited today.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened 

Shares of Chinese and other international companies jumped sharply on Tuesday as hope spread that China's zero-COVID policy may be coming to a close. Rumors are floating that a government committee has been formed to study a plan for fully reopening China in March 2023. 

Markets across Asia were trading higher and some notable names were moving in U.S. markets today. Tencent (OTC: TCEHY) jumped as much as 11% in trading, Kingsoft Cloud Holdings (NASDAQ: KC) was up as much as 15.4%, GDS Holdings (NASDAQ: GDS) was up 18.7%, and Chindata Group Holdings (NASDAQ: CD) was up 13% at its peak. Shares of the companies are trading 9.4%, 9.5%, 10.9%, and 5.8% higher at 12:30 p.m. ET. 

So what 

China's zero-COVID policy has been responsible for extended citywide shutdowns across the country in the past three years and has impacted both domestic demand as well as exports to the rest of the world. So, when rumors spread that a committee will be looking into how to end the lockdowns, the market cheered. 

What's not clear at this point is if any committee is actually going to meet. China's Foreign Minister's spokesperson said they were "unaware" of the committee, and that's the extent to which the government has commented. 

Given the recent end to the Party Congress, which sets the political leaders for the next five years in the Communist Party in China, this would be a likely time to start ending zero-COVID. Given what the rest of the world knows about the virus, it's unlikely any economy could maintain a zero-COVID policy indefinitely and China will likely come to that realization eventually. In investors' eyes, the sooner the better. 

Now what 

The market is simply reacting to rumors at this point, but I don't doubt that changes are on the horizon. Data released yesterday indicates that factory activity contracted in China last month, which isn't great for an export-heavy country. China is dealing with countries like the U.S. onshoring more of their production as rising labor and shipping costs have made outsourcing less economical. 

At the same time, domestic demand isn't growing enough to fill the gap that falling exports may leave. That's put China in a tough position, potentially forcing the government to open up the economy earlier than it might otherwise like. 

We don't know exactly what any reopening would look like and it's likely to be chaotic given the years of ups and downs Western countries dealt with during the pandemic. But today investors are cheering even the possibility of China reopening, overlooking the potentially problematic increase in President Xi Jinping's political power that sent stocks lower just last week. Investors have short memories, and that's why I would be very cautious investing in China today. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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