The Lion-OCBC Securities China Leaders ETF, listed in Singapore dollars, seeks to replicate the performance of the Hang Seng Stock Connect China 80 Index. Its components include tech, electric vehicles, banks, real estate and basic materials.
On May 25, the China Leaders ETF broke below several times tested support at the $1.56 level. Before the breakdown, prices had moved below their 50-, 100- and 200-day moving averages, with the 100- and 200-day moving averages turning down in the week of May 15-19. There is some support at $1.46, and indicators may be sufficiently oversold to trigger a rebound.
The popular Lion-OCBC Securities Hang Seng Tech ETF (HS Tech), which attempts to replicate the Hang Seng Tech Index, has performed better than the China Leaders ETF in the past two weeks, reflecting the relative resilience of Chinese tech stocks in May. They had shown weakness since February this year.
HS Tech ETF is down more than 10% since the start of the year, while China Leaders ETF has lost just 1.1%. HS Tech’s support is at 60 cents. Since short-term RSI has bounced off its oversold 30 lines, there is a chance that this support holds. However, any rebound will likely be tepid, with 63 cents providing some resistance.
Weakness in the Chinese ETFs reflects analysts and strategists lowering their outlooks. Analysts are pointing out that after the quick release of pent-up demand domestically, China’s post-pandemic economic recovery has been rapidly losing steam since April. Nomura points out that China’s outbound tourism recovery appears sluggish.
“The resumption of international flights has stagnated at nearly 40% of the pre-pandemic 2019 level since the surge during the Labour Day holiday — the first multi-day national holiday in China since the end of the pandemic — while the balance of payments data show outbound tourism expenditure recovered to 70.5% of the pre-pandemic level,” Nomura adds.
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Growth momentum has continued to weaken, with property sales (including in large cities) and a slew of economic data showing notable sequential declines. Nomura adds that weaker growth has notably impacted market sentiment, as evidenced by visible retreats in rates, stock markets and RMB.
No surprise then that capital outflow pressures have picked up significantly, with the daily northbound net-selling through the Stock Connect reaching its largest in seven months.
Elsewhere, market watchers point out that renewed property distress has increased default risks of developers and local government financial vehicles (LGFVs). The prices of offshore bonds issued by some major developers had fallen sharply back to levels before the 16-point measures were introduced. LGFVs are stretched to honour their mounting debt, as repayment pressures are set to rise further, and land sales revenues continue to shrink.
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On the labour front, China is an outlier. It is the only major economy that witnessed a notable increase in youth unemployment during Covid-19. Some argue this is due to a mismatch between skill and education levels and available jobs or between academic disciplines and real business demand.
Certain sectors, such as construction, continue to suffer from labour shortages. However, Bank of America (BoA) believes that cyclical economic weakness is the most important driver of youth unemployment. “Existing structural issues were exacerbated by economic shocks in the past three years — the pandemic, property market downturn and regulatory tightening,” BoA says.
