PGJ - China Selloff: Trading The Worst-Performing Single-Stock And ETFs In 2023

2023-10-30 08:50:22 ET

Summary

• China's CSI 300 index hits a 4.5-year low, sparking concerns about the property sector's impact on the broader financial markets.
• Chinese stocks have experienced a significant decline in 2023, reversing their previous strong performance.
• Chinese President Xi Jinping's visit to the People's Bank of China and plans for a new fiscal stimulus package aim to bolster sentiment in the financial markets.

One of China's major stock indices-the CSI 300-recently slumped to a 4.5-year low.

By Andrew Prochnow

Recently, a significant indicator for Chinese stocks reached its lowest level since 2019, sparking concerns that the negative sentiment within China's struggling property sector had spilled over into the broader financial markets. On October 24, the CSI 300 Index hit its lowest point of the year at 3,450 before experiencing a rebound on October 25. In tandem with the CSI 300, the widely tracked iShares China Large-Cap ETF ( FXI ) also traded at the lower end of its 52-week range.

Year-to-date, the CSI 300 Index has declined by approximately 10%, while the large-cap-focused FXI has fallen by a more substantial 13%. In contrast, the tech-heavy KraneShares CSI China Internet ETF ( KWEB ) has experienced a sharper decline of over 17%.

Interestingly, the recent declines in Chinese stocks represent a remarkable reversal of fortune, especially considering that the Chinese segment of the global financial markets had been one of the top performers at the close of 2022 and throughout the first quarter of 2023.

As an example of this trend, investors and traders may vividly recall that Baidu ( BIDU ) was trading at less than $80 per share just last October but then embarked on a robust rally, reaching as high as $160 per share by March 2023. However, today, Baidu's shares have slumped back to approximately $108, underscoring the seriousness of the current downward trend.

A year ago, Chinese stocks received a boost from the reopening of the Chinese economy following the COVID-19 pandemic. During that time, optimism pervaded the financial markets, with many anticipating a return to the robust growth seen in China before the pandemic.

Regrettably, the economic rebound in China turned out to be short-lived as consumer confidence waned in the midst of the ongoing property crisis. Currently, concerns among Chinese consumers and businesses remain elevated, which likely explains why President Xi Jinping of China swiftly took action to bolster sentiment in the financial markets on Oct. 25.

One day after the CSI 300 marked its 4.5-year low, the Chinese President made an unexpected-and unprecedented-visit to the People's Bank of China (PBOC). According to multiple reports , it was the President's first known visit to the Chinese central bank since taking power over a decade ago.

Although the reason for the visit has not been officially disclosed, the financial markets broadly perceived it as a favorable development. Chinese stocks experienced a significant upturn on both October 25 and 26.

During President Xi's visit to the central bank, the Chinese government signaled its intention to implement a new fiscal stimulus package to support the domestic economy. Moreover, they appointed a new Minister of Finance, Lan Foan, to lead the economy through the present period of uncertainty.

Additional details on the forthcoming stimulus should be revealed in the near future.

Trading Chinese Single-Stocks and ETFs Listed on Major U.S. Exchanges

Given the substantial decline in Chinese stocks in 2023, it's evident that some contrarian investors and traders are seeking opportunities for a potential rebound.

Accessing the Chinese financial system can be challenging for foreigners, which is why numerous active investors and traders turn to the U.S. market for exposure to Chinese stocks. In this context, we will spotlight some of the highest-capitalized individual Chinese stocks traded on U.S. exchanges.

As of January 2023, there were roughly 252 Chinese companies listed on U.S. stock exchanges with a total market capitalization exceeding $1 trillion. Additionally, there are more than 50 ETFs listed on U.S. exchanges that are focused on the Chinese markets.

Listed below are 20 of the highest-capitalized Chinese single stocks listed on U.S. exchanges (sorted by year-to-date return):

• New Oriental Education ( EDU ), +89%
• Li Auto ( LI ), +65%
• Xpeng ( XPEV ), +44%
• NetEase ( NTES ), +38%
• TAL Education ( TAL ), +29%
• Pinduoduo ( PDD ), +28%
• KE Holdings ( BEKE ), +4%
• Vipshop ( VIPS ), 0%
• Trip.com ( TCOM ), -2%
• Yum China Holdings ( YUMC ), -7%
• Baidu ( BIDU ), -9%
• Alibaba ( BABA ), -10%
• ZTO Express ( ZTO ), -14%
• Tencent Music ( TME ), -17%
• iQIYI ( IQ ), -19%
• Nio Inc. ( NIO ), -20%
• Full Truck Alliance ( YMM ), -22%
• Kanzhun ( BZ ), -31%
• Bilibili ( BILI ), -51%
• JD.com ( JD ), -55%

What's most interesting about the above performance figures is that despite the pullback in the major Chinese stock indices, there have been plenty of big winners in 2023, as well.

On top of that, there's no discernible trend when it comes to sector classification. For example, JD.com is a retail-focused internet company that's seen its shares plummet by more than 55% in 2023. On the other hand, another internet focused company-NetEase-has seen its shares rally by nearly 40% this year.

That same divergence has also been observed in

the electric vehicle (EV) sector , with LI and XPEV rallying in 2023, and NIO slumping. Depending on one's outlook, approach and risk profile, there might be opportunities for pairs trading some of these divergences- especially with underlyings that historically share a strong, positive correlation .

ETF as Options

For investors and traders that prefer to access exposure to China using exchange-traded funds (ETFs), there's also a wide range of listings to choose from. Highlighted below are some of the U.S.-listed ETFs with the largest amount of assets under management that are focused on the Chinese market (sorted by year-to-date return):

• Invesco Golden Dragon China ETF ( PGJ ), -10%
• iShares China Large-Cap ETF ((FXI)), -13%
• X-trackers Harvest CSI 300 China A-Shares ETF ( ASHR ), -13%
• Global X MSCI China Consumer Discretionary ETF ( CHIQ ), -14%
• Franklin FTSE China ETF ( FLCH ), -15%
• iShares MSCI China A ETF ( CNYA ), -15%
• iShares MSCI China ETF ( MCHI ), -15%
• SPDR S&P China ETF ( GXC ), -15%
• KraneShares MSCI China Clean Technology Index ETF ( KGRN ), -16%
• KraneShares CSI China Internet ETF ( KWEB ), -17%
• KraneShares Bosera MSCI China A 50 Connect Index ETF ( KBA ), -17%
• WisdomTree China ex-State-Owned Enterprises Fund ( CXSE ), -21%
• KraneShares SSE Star Market 50 Index ETF ( KSTR ), -22%
• Invesco China Technology ETF ( CQQQ ), -24%
• iShares MSCI China Small-Cap ETF ( ECNS ), -28%

In contrast to the single-stock market, where there's a mix of winners and losers in 2023, nearly all the major Chinese ETFs are experiencing negative performance, as demonstrated by the year-to-date returns mentioned earlier.

The extent of these losses differs due to the distinct holdings of these products, with the small-cap-focused ECNS showing the most significant declines this year. For contrarian investors who hold a positive outlook on the future of the Chinese stock market, one or more of the aforementioned ETFs might present an appealing opportunity for medium or long-term investment.

To learn more about trading country-focused ETFs such as iShares China Large-Cap ETF ((FXI)), readers can check out this installment of Options Jive on the tastylive financial network. For more background on pairs trading, this episode of Small Stakes is also recommended.

Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor Luckbox Magazine.

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