What happened

China is beginning to scale back its zero-COVID policy, which could lead to Chinese citizens and visitors having more freedom to travel around the country. Shares of China Southern Airlines (ZNH) climbed as much as 13% this week, according to data provided by S&P Global Market Intelligence, as investors bet on one of the world's most important aviation markets beginning to normalize.

So what

China has followed a very different path through the pandemic compared to most of the world. The "Great Reopening" that occurred in 2021 in the U.S. and elsewhere following the introduction of COVID-19 vaccines never occurred in China, where government officials have instead relied on lockdowns and strict testing guidance to keep the population safe.

Those policies made travel difficult, if not impossible, but it appears China is beginning to scale back how it handles the virus. The country announced this week that authorities will no longer be able to put whole city blocks on lockdown at the first sign of a positive COVID-19 test in the neighborhood, and that Chinese citizens will not be subject to the same frequency of testing when traveling domestically.

In the West, the easing of restrictions led to an explosion in demand for travel. Investors appear to be hoping that a similar uptick in demand will occur in China as citizens are allowed to travel more freely, giving a lift to China Southern and other Chinese airline stocks.

Now what

There is still reason for caution. To state the obvious, China and the U.S. are two very different countries with very different political systems, and it is unclear that what happened in the West is a good indication of what will happen in China.

More broadly, Chinese leaders are caught in a difficult moment as they try to ease restrictions that have been burdensome but also protect a population that is not vaccinated at the same rate as Western populations are. It is possible that if there is an uptick in infections in the weeks to come, China could reverse course once again, putting whatever "reopening trade" there is at risk.

China is an important aviation market, and China Southern as a leader in domestic travel should be a long-term beneficiary of growing demand. But investors buying in on the hopes of a U.S.-style reopening rally should brace for potential turbulence up ahead.