(Bloomberg) -- Chinese equities rallied and the yuan strengthened past a key level, as the authorities accelerated a shift toward reopening the economy and more investors turned bullish. 

The yuan breached the 7-per-dollar level, while a gauge of Chinese tech stocks in Hong Kong surged 9.3% in a fifth day of gains. The dollar bonds of developers also rose as financial hub Shanghai and neighboring Hangzhou joined other cities in easing Covid-Zero curbs. 

Months of volatility in Chinese assets have given way to a buying spree as money managers grow increasingly convinced that the tide has finally turned on a market brought low by Beijing’s regulatory crackdown and Covid policy. But even as the bullish calls pile up, analysts such as Grow Investment Group’s Hao Hong caution that rising infections may induce more price swings in the near term.

Read: Morgan Stanley Upgrades China Stocks on Reopening Bullishness

For now, a steady rollback of restrictions in the past weeks is generating a buzz not seen in a while. The Hang Seng China Enterprises Index surged 29% last month, the best performance since late 2003, while the onshore yuan gained by the most since 2018. 

“There are more signs of relaxation of Covid curbs, and the positive factors have not been fully priced in by the market,” said Kenny Wen, head of investment strategy at KGI Asia in Hong Kong. “I expect more funds to continue to hold long positions in the remainder of the month for year-end window dressing purposes.”

The loosening of restrictions, coupled with a property rescue package, has resuscitated Chinese equities after a $6 trillion rout that culminated in the Communist Party congress in October. Investors are expected to zero in on longer-term plays such as consumer and health-care shares as the economy recovers.

Morgan Stanley on Sunday lifted Chinese equities to overweight from an equal-weight position it had held since January 2021. Goldman Sachs Group Inc. predicted that China’s stocks will outperform in 2023, while Bank of America Corp. said it has turned tactically positive. 

Other Chinese benchmark stock gauges also advanced on Monday, with the CSI 300 Index and Shanghai Stock Exchange Composite Index rising almost 2%. A gauge of Macau gaming shares rallied 11% while the onshore yuan jumped as much as 1.5% to 6.9473 a dollar, the strongest since Sept. 13. 

The rally spilled over into the credit market, with traders saying that property firms’ dollar bonds rose at least 3 cents on Monday. Country Garden’s 8% dollar bond due 2024 rose 7.4 cents to 70.7 cents as of 4:23 p.m. in Hong Kong, according to Bloomberg-compiled prices. It’s poised for its highest close since June.

China junk dollar notes, dominated by the property sector, rose to an average 65 cents on Friday, the highest in three months, a Bloomberg index showed.

Read: China’s Biggest Builder Posts 404% Bond Return on Policy Shifts

Shanghai Shift

Shanghai joined Beijing, Shenzhen, Guangzhou, Zhengzhou, and other Chinese cities in shifting toward reopening after recent protests. Most places will no longer require PCR results for access to local public transit and many shared spaces. The easing comes after Chinese Vice Premier Sun Chunlan said last week that the country’s pandemic control has entered a new phase.

Covid Zero will probably formally remain in place until April, though the risk of an earlier but managed exit has increased, according to strategists at Goldman Sachs. 

“We judge recent public protests against the tight Covid curbs have put pressure on the government to hasten its reopening plans,” Commonwealth Bank of Australia strategists led by head of international economics Joseph Capurso wrote in a note. “Dollar-yuan can extend its losses this week if there are further signs China is readying to exit its strict Covid policies.”

China’s Covid stance aside, investors are also weighing the impact of a robust US jobs report as well as a slowing of aggressive Federal Reserve rate hikes, which have hurt global markets this year.

Some analysts remain wary, warning that the yuan will only sustain gains if Beijing manages to ensure a solid economic recovery next year. The upcoming December Politburo meeting, which provides high-level guidelines for economic policy making, is the next key focus.

“It’ll take time for China to exit from their Zero Covid policy,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. “In the near term, China’s economy continues to face headwinds from the prolonged property market slump and high Covid infections weigh on consumption recovery. These factors may limit the gains in the yuan.”

--With assistance from Chester Yung, Matthew Burgess, Lorretta Chen and Dorothy Ma.

(Updates prices throughout and adds Macau gaming shares index in eighth paragraph)

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