Chinese ETFs surge after Zero-COVID policy is relaxed

What's going in China?

After over two years of the pandemic, Chinese citizens appear to have reached a boiling point. Protests began in major cities around the country decrying the extreme nature of the Zero-COVID policies. In response, the Chinese government has begun a so-called "COVID-pivot." 

Despite winter usually being a peak season for COVID infections, Chinese authorities have apparently given in to protestors’ demands. Now, commuters can board public transportation without a COVID test in the preceding 48 hours, a previously enforced restriction. 

Businesses are reopening cautiously too. Previously, sudden enforced closures of retail and restaurant businesses in the consumer cyclical sector were one of the largest contributors to market uncertainty. Take a look at this risk disclosure from Luckin Coffee's November 2022 Form 6-K, where the company outlines how the Zero-COVID policies continue to affect its business:

"The Company had around 108 daily store closures on average in July and August 2022. However, as the winter season approached with bouts of COVID-19 cases in recent months, the Company experienced around 330 daily store closures on average in September and October 2022. As of the date of this earnings release, the number of daily store closures on average in November 2022 was around 500, and we believe this number may further increase for the months ahead."

This type of uncertainty is highly difficult for investors to price in. How do you get an accurate forecast of future revenues and earnings if you don't know the probability of a store being closed? How do you estimate the probability of a store closure due to Zero-COVID policies enacted by an unpredictable and authoritarian government? The first quant trading firm to figure out an algorithm for this will make a killing in the Chinese market.

ETFs to bet on China with

When it comes to Chinese equity ETFs, investors have two choices: focus on the broad Chinese market or focus on a subset of the Chinese market. Most of these ETFs are up heavily compared to a month prior, so exercise caution when buying. 

The first option is the cheaper one better suited for buy-and-hold investors. Broad Chinese market ETFs tend to have lower volatility and drawdowns than their sector counterparts and more reasonable expense ratios. Examples include:

• iShares MSCI China ETF (MCHI)
• SPDR S&P China ETF (GXC)

Sector ETFs offer more concentrated exposure to a particular industry in the Chinese market. The most volatile ones out there tend to deal with the information technology and consumer discretionary sectors given their higher betas. Examples include:

• KraneShares CSI China Internet ETF (KWEB)
• Global X MSCI China Consumer Discretionary ETF (CHIQ)

Finally, investors who are looking for leveraged or inverse exposure can make use of the following ETFs. Keep in mind that these ETFs are intended for short-term trading purposes and their long-term performance can differ wildly from the daily leverage targets. Examples include:

• Direxion Daily FTSE China Bull 3x Shares (YINN)
• Direxion Daily FTSE China Bear 3x Shares (YANG)

Please note this article is for information purposes only and does not constitute investment advice.