(Bloomberg) -- The yuan dropped at the start of what may be another volatile week for Chinese markets after health officials vowed to “unswervingly” stick to a Covid Zero approach, damping optimism that Beijing was working toward easing restrictions. 

The offshore yuan dropped 0.8% to 7.24 per dollar, unwinding some of Friday’s 2% surge. The Australian dollar -- a China-risk proxy -- fell over 1%, while the greenback advanced on haven demand. 

Assets from equities to oil rallied last week on conviction China would take concrete steps toward reopening. The Hang Seng China Enterprises Index had its best weekly gain since 2015, Brent crude closed at the highest in two months.

But risk assets now face a rough Monday after authorities tempered those hopes in a briefing Saturday. 

“Previous practices have proved that our prevention and control plans and a series of strategic measures are completely correct,” said Hu Xiang, an official at the National Health Commission’s disease prevention and control bureau.  

The comment is the latest from government officials to back a strict adherence to China’s reliance on lockdowns and mass testing to stamp out infections. The approach has weighed on the economy, which in turn has dragged on financial markets.

 

Goldman Sachs Group Inc. said China has given some signs of a potential exit from Covid Zero, such as trying to alleviate public fears of the coronavirus and other medical preparations. However, “the government still needs to keep its zero-Covid policy until all preparations are done,” economists including Hui Shan wrote in a note.

That may take months, according to Goldman, which expects a reopening in the second quarter of next year.

Still, the repeated signs of a reopening followed by government denials of any changes have kept investors on the edge and added to market volatility. Investors have been looking for reasons to scoop up Chinese stocks, which are among the worst performers in the world this year as the economy grows near the slowest pace in four decades.

Markets were boosted last week by unverified online posts about China’s reopening, as well as headlines supporting the easing scenario: Bloomberg reported that officials are working on plans to end Covid flight suspensions, while German Chancellor Olaf Scholz said China would make BioNTech’s Covid shots available to foreigners in the country, a potential first step toward wider offerings. 

The rebound took place just one week after a historic rout in equities sparked by concerns about President Xi Jinping’s power grab at the Communist Party congress. 

While Chinese equities are likely to fall on Monday, expectations for further stimulus from the government after weak economic data and gains in Covid-19 cases in October could help limit the decline, according to Cui Xuehua, China equity analyst at Meritz Securities Co. in Seoul.

“I expect there would be a reversal of the last week’s gains, but I believe the stock markets are not likely to break the previous lows,” she said. “The fact that rumors have spread is a positive signal that the Chinese government is internally discussing easing virus restrictions.”

Shujin Chen, analyst at Jefferies Financial Group Inc., expects ample liquidity in China and hopes on a potential open-up “could fuel a rebound like in June after some profit taking this week.”

However, some analysts warned of continued market turmoil even before the health officials’ comments over the weekend.

“We expect confusion could go on for a while,” said KB Securities strategists including Park Su-Hyun in a note dated Friday. 

--With assistance from Michael G. Wilson, Matthew Burgess, Garfield Reynolds and Wojciech Moskwa.

(Adds Jefferies quote in third last paragraph.)

©2022 Bloomberg L.P.