What happened

Shares of Nike (NKE -2.49%) were marching higher Friday as the sportswear giant got some good news out of China. Though there were no company-specific updates, hints that China could soon relax its strict zero-COVID policy, combined with indications that a key issue between U.S. and Chinese securities regulators could be moving rapidly toward a mutually acceptable resolution, sent Chinese stocks soaring Friday. The Hang Seng jumped by 5.3% in its session, and the Shanghai Composite rose 2.4%.

Since China is a key growth market for Nike, the stock responded favorably to the news, and was up 4.5% as of 12:05 p.m. ET. 

So what

The optimism about a possible relaxation of China's strict COVID-containment policies seemed to be based mostly on rumors and social media posts. However, Reuters did report that a former Chinese health official told a private conference that significant changes to the zero-COVID policy are set to take place in the next five to six months. That policy has largely held the disease in check in the massive nation, but has been a serious headwind to its economy, particularly in the retail sector. Chinese health authorities have scheduled a news conference on the subject for Saturday at which they could confirm the rumors. 

China was a particular pain point in Nike's most recent quarter. In its fiscal Q1 2023, which ended Aug. 31, revenue in the Greater China region fell 16% to $1.7 billion (about 13% of total revenues), and operating profit from the region dropped 23% to $541 million.

Prior to the pandemic, China was generally considered Nike's most important growth market, and with a population of 1.4 billion and a fast-growing middle class known for a culture of conspicuous consumption, it has the potential to be a valuable growth market again.

Now what

Investors may not want to jump to conclusions as there has been no official word yet to indicate a relaxation in China's COVID-fighting policies is coming, but outside of China, Nike's growth remains strong. The footwear and apparel company's three other regions grew sales by at least 13% on a constant-currency basis in the most recent quarter. 

If its China business recovers and Nike is able to control its inventory levels, this footwear stock could have a lot of upside potential, as it's still down by nearly 50% from the peak it touched a year ago.