BEIJING, NOVEMBER 3

China's COVID-19 cases hit their highest in two and a half months on Thursday after the health authority stuck by its strict containment policy, dampening investor hopes for an easing of curbs battering the world's number two economy.

Beaten-down Chinese stocks had soared this week on speculation that Beijing would ease its 'dynamic zero-COVID' policy, despite the rising case numbers and reiterations of a stance that makes China an extreme outlier nearly three years into the pandemic.

The impact of the curbs continued to reverberate, as a prominent survey showed services activity contracting further in October on the impact of COVID curbs on businesses and consumption.

The Caixin services purchasing managers' index fell to 48.4, the lowest since May, from 49.3 in September.

With zero-COVID lockdowns hitting major cities, some of China's richest regions are proving to be a drag on recovery, reporting slower growth than the national economy for the first three quarters, data released through Wednesday shows.

Hong Kong and China stocks fell, ending a two-day rally as confidence was hit by the rising COVID count and expectations that the Federal Reserve would keep raising U.S. interest rates.

'There may be some easing on zero-COVID, but temper your expectations,' Nomura analysts wrote, adding that a 'real reopening' becomes more likely only after March, when China completes a political transition culminating with its annual parliamentary gathering.

Nomura estimated a population accounting for 10.1% of China's gross domestic output was under lockdown, up from 9.5% on Monday.

Any fine-tuning of the COVID policy in the near term 'could be more than offset by local governments tightening their grip, as officials take hints from the 20th Party Congress meeting last month,' Nomura wrote.

DISAPPOINTED HOPES

Investor hopes that last month's twice-a-decade congress of the ruling Communist Party would mark a milestone after which China could lay groundwork to begin dialling back from zero-COVID were disappointed when Xi Jinping, who secured a third leadership term, reiterated the validity of the approach.

This week, investor optimism returned even though Beijing has not shown signs it was readying a significant easing, such as undertaking mass booster-shot campaigns, greenlighting foreign mRNA vaccines or changing the messaging that has sown extreme fear of catching COVID.

In its first comments after the congress, the National Health Commission said on Wednesday the authorities were striving to control a sudden COVID outbreak as quickly as possible. The nation should unwaveringly stick to zero-COVID, the commission said.

China reported 3,200 daily local COVID-19 cases on Thursday, the first tally above 3,000 since Aug. 17.

Lenovo, the world's largest maker of personal computers, said revenue from China fell 12% in the July-September quarter as COVID curbs weighed on demand.

FIH Mobile 2038.HK, a unit of Apple supplier Foxconn 2317.TW said on Wednesday zero-COVID was a key reason it was likely to post a full-year loss as its parent continues to grapple with a lockdown around its major iPhone factory in central China that has fuelled worker discontent.

Electric vehicle maker NioNIO.N9866.HK, by contrast, resumed production at its two factories, a day after saying it had suspended work due to COVID measures.