China Market review – June 2022

Article written in June 2022

💡 What’s happening on the Chinese markets? 💡

Over the past 3 months, $China50 has been stable (return: -0.5%) while the $SPX500 lost 4% and $NSDQ100 lost about 8%. Over the last 30 days, $China50 gained 7%, while $NSDQ100 and $SPX500 remained flat (eventually; although we did witness a lot of volatility in the last 30 days on the US markets).

🎯 Could this be the right time to invest in Chinese equities? 🎯

1. Let’s recap the previous events that have affected the Chinese markets:

📉 a) The halt of Ant Group’s IPO and the start of the regulatory crackdown:

In October 2020, Ant Group’s IPO was suddenly halted, on the eve of the day it was supposed to happen. Alibaba ( $BABA (Alibaba) ) share price dropped sharply from its ATH above $300, as it was supposed to benefit from the IPO of one of its greatest affiliate companies.
Instead, this event marked the start of an intense campaign of regulation from the Chinese government and state institutions within China, aiming at controlling better the tech giants like Alibaba, Meituan, Tencent etc.

📉 b) Continuous Covid lockdowns:

China’s government is not willing yet to let go of the Zero Covid policy, as they have major concerns about the consequences an uncontrolled Covid spread could have on elderly populations that have not been vaccinated.
As a result, lockdowns have been paralyzing part of the country, including major cities like Shanghai, and threatening even Beijing.

📈 c) The end of the regulatory pressure?

Mid-May 2022, Chinese officials have actually given positive signs of relief regarding the regulatory pressure on tech companies, in an effort to support the economy badly hurt by the Covid lockdowns (see Article 1).
The market went up on the news; to me, this wasn’t 100% a good news, as it meant that the Zero Covid policy would last a while longer. Yet, good to see the regulation effort calming down.

📈 d) Lockdown reliefs:

Lockdowns actually helped to bring the number of Covid cases down, and now we are witnessing a significant relief in the restrictions in major cities like Shanghai and Beijing (see article 2).
This can have a positive effect on the economy, and could potentially help reduce inflation in western countries if the pressure on supply chains is being alleviated.

2. What could come next?

📈 a) A greater cooperation between China and the US to counter inflation:

This could be a great news for the two biggest economies on the planet. To counter the rising inflation in the US, Biden is considering easing some of the tariffs imposed on China goods during Trump’s era (see article 3).

📈 b) Towards an end of the Zero Covid policy?

Eventually, China will follow the rest of the world and relax Covid-related restrictions – it’s hard to tell when, but the government is well aware that restrictions are having serious adverse effects on the economy and people’s mental health.
When they will judge that letting Covid run would have less negative impact than imposing restrictions (because collective immunity would have increased, vaccination rate as well etc), the Covid chapter will be over.
At that point of time, Chinese equities will jump, as well as the rest of the world (positive effect on supply chain issues, inflation etc).

I hope this can help you make a decision about investing part of your portfolio into Chinese equities – check out the related ETFs like KWEB, CQQQ, YINN etc.
This article reflects my personal opinion and is not an investment advice.

Thank you and trade safe!

Nico

Sources:
Article 1: www.cnbc.com/2022/05/18/china-signals-easing-of-its-tech-crackdown-but-dont-expect-a-u-turn.html
Article 2: www.straitstimes.com/asia/east-asia/beijing-inches-closer-to-zero-covid-19-cases-as-curbs-eased
Article 3: www.cnbc.com/2022/05/10/inflation-biden-says-lowering-prices-is-his-top-economic-priority-.html