While China has not relaxed its zero-covid policy, the recent decision to cut quarantine restrictions for inbound travellers and flights is seen by many as an opening stanza in the middle kingdom’s protracted reopening narrative.

The relaxing of quarantine requirements for travellers also coincides with scheduling of high-profile future international events, including the Formula One race in Shanghai.

While Chinese stocks will be the first beneficiaries of restrictions being lifted, close behind are likely to be iron ore stocks whose fortunes are directly wired to China’s steel industry.

Healthy rally

Desperate for good news, Iron ore futures were up 2.1% to US$90.90 a tonne following revelations that China was easing some covid measures. Rumours circling last week, that China was preparing to further scale back covid restrictions, saw iron ore on China’s Dalian commodity exchange climb to its highest in two weeks.

Unsurprisingly, ASX-listed iron ore majors were amongst China-exposed stocks that staged a healthy rally last week, and Hong Kong stocks jumped 7%-plus on media reports of China’s easing travel restrictions.

Where to from here?

While economists don’t expect China to reopen until after the National’s People’s Conference (NPC) in March 2023, brokers are already starting to speculate how a reopening might take shape.

Within a recent note in Asian equities, JPMorgan reminded investors its long China call for October is belatedly showing signs of life.

Desperate for any blue sky, investors the broker spoke with, appeared keen to capitalise on low valuations and buy on the mere whisper of marginal improvements in re-opening, property risk containment, policy visibility, and/or geopolitics.

Eased mobility restrictions

Meantime, talk of China’s reopening has coincided with renewed optimism that new leadership appointments, made during the NPC, could benefit strained trading relations.

Recent conversations between prime minister Anthony Albanese, and his Chinese counterpart, suggest a possible thawing of the frosty diplomatic impasse between the two countries, leading to an easing of trade restrictions.

JPMorgan also reminded investors that historically, incoming politburo teams, have initiated new policy measures to build credibility.

“Taiwan may also re-rate should perceived geopolitical risks ease on the margin.”

Chinese stocks could rally 20%

Goldman Sachs believes an eventual reopening of the world’s second largest economy could drive a 20% increase in Chinese stocks, potentially adding $2.6tn to the equity market.

The broker reminded investors that companies selling discretionary goods to the local population (domestic cyclicals) and consumer sectors tend to outperform when covid policies are relaxed. 

Assuming the following conditions are in place, Goldman Sachs expect a reopening to begin in the second quarter of 2023, these include:

• A significantly higher vaccination rate for the elderly

• Broader accessibility to affordable and effective covid pills

• Improvements in communication around covid

• The availability of sufficient medical resources to combat new waves of infection

However, the broker notes Chinese equities could fall by -15% if reopening is delayed or doesn’t materialise.

Likely beneficiaries of China’s reopening play

IPD Education (ASX: IEL)

If the benefits IPD received from India’s reopening is any proxy, pent-up demand unleashed from China, once the economy reopens, may help a return to pre-covid numbers.

Macquarie expects an easing of lockdowns in China to see Australia's student volumes exceed 2019 levels and has lifts its earnings per share (EPS) forecasts 3%, 4% and 4% through to FY25.

The broker’s Outperform rating and target price of $32.00 are retained.

IDP Education share price over 12 months.

Treasury Wine Estates (ASX: TWE)

While the wine giant has successful transitioned away from China, any unwinding of hefty trade tariffs could have a material impact on exporters to this market.

The Chinese government imposed heavy tariffs of up to 175.6% on many Australian wine producers [including Treasury Wines] from November 2020.

As a result, earnings from the group’s mainland China business fell to $2m in the six months ended December 31, compared with $78.2m a year earlier.

An unwinding of China-imposed tariffs would coincide with what Citi sees as rising risks for the broader wine industry from a slowing recovery in higher margin channels and the effect of cost-of-living pressures on consumer discretionary spending.

The broker’s Neutral rating and $13.50 target are unchanged.

Treasury Wine Estates share price was up 2% at the close today.