(Bloomberg) -- Betting that Chinese stocks will extend the world’s worst run of losses just got a whole lot riskier.

A frenzied two-day rally in the nation’s shares -- built on the flimsiest of speculation -- gives a small taste of how epic price moves will be if or when authorities in Beijing give a clear signal on ending their Covid-Zero policy.

With global fund managers holding the heaviest positions in cash in two decades, there is a mountain of dry powder waiting to buy. It also means that for short sellers, who last week made $4.4 billion of month-to-date mark-to-market profits over a couple days, the risks of getting wrong-footed are rising.

All it took to turn the tables this week were screenshots of unverified documents on social media that suggested officials were preparing to reopen the economy. That sent the Hang Seng China Enterprises Index surging more than 8% across Tuesday and Wednesday in the wildest swing globally. 

“You just can’t be too bearish right now even if you want to be -- look at the ferocity,” said Rob Mumford, an investment manager at GAM Hong Kong Ltd. “If the government signals properly on Covid then the move will be really fast. We’ll stay invested and can adjust our regional portfolios quite quickly.”

That signal looks some way off, with the National Health Commission issuing a statement late Wednesday that said China would “firmly adhere” to the general policy of Covid Zero. US-listed Chinese stocks shrugged off the news, jumping as much as 4.5% before paring gains when Federal Reserve Chair Jerome Powell dashed hopes of an early pivot away from hawkish monetary policy.

GAM is underweight China but “not massively” as it looks to minimize losses and preserve capital while positioning for the market to move in either direction. “Trading China is so nerve-wracking and we don’t want to be chewing our fingers every day,” he said. “We want to ensure we’re OK when the market is down and don’t get killed on the way up.”

Regardless of whether there is any truth in the social media posts, what is clear is that there is plenty of easily deployable money sitting just outside markets. According to Bank of America Corp.’s most recent survey, fund managers globally hold 6.3% of their positions in cash, the highest proportion since 2001. 

The ground has shifted quickly for options traders who snapped up hundreds of contracts last week allowing them to profit from further declines in the Hang Seng China Enterprises gauge.

The value of these derivatives dropped as much as 93% in a day during this week’s rally. That coincided with a switch in sentiment that saw Wednesday’s most popular contract being a bullish call that the index will rise to 7,000 points by year-end -- implying an advance of more than 30% from current levels.

“The upside is way more significant than any downside,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “We can unwind all our hedges and can potentially boost our China stock positions by a quarter. We have more than enough dry powder.”

Goh, who helps run more than $1 billion at the multi-family office from Singapore, has cut stock-index hedges by about half over two days. His firm also loaded up on single-stock bets including CSPC Pharmaceutical Group Ltd., liquor maker Kweichow Moutai Co. and food-delivery company Meituan.

Morgan Stanley’s Laura Wang, part of the equity strategy team that last week warned Chinese stocks were about to get wilder, said volatility would “stay high in the near term with complexity around Covid relaxation,” according to a note on Wednesday.

Her team’s targets for the MSCI China Index imply gains of 40% in a bull case or losses of 26% in a bear case through June next year -- a yawning gap that captures the wide range of potential outcomes for Chinese stocks right now.

After President Xi Jinping’s consolidation of power spooked investors last week, this week is all about surmising the outlook for Covid Zero. Investors will be screening for anything to suggest a shift is coming from Beijing.

“I would be closely monitoring state media,” said Yufei Xia, a money manager at Dymon Asia Capital in Hong Kong. “If they start to tone down on their propaganda about how horrible Covid is then I will really have confidence that the reopening is near.” 

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