MCHI - GXC And MCHI: COVID Casts Doubt On China Again

Summary

• China is seeing another COVID spike. This may lead to a scale back of its economy reopening plan.
• The SPDR GXC China ETF looks relatively worse positioned vs MCHI, possibly driven by higher exposure to lockdown sensitive sectors.
• My technical analysis view using the Trend Flow, Support/Resistance Location, and False Breakout Traps suggests a pullback is due after recent bullish momentum.

Introduction

Last week, I analyzed the iShares MSCI China ETF (MCHI), with a bullish stance based on the removal of COVID restrictions reviving a rebound of activity by the Chinese Consumer.

Now, with the new COVID variant coming into play, I have turned slightly more cautious as the lack of prior exposure and herd immunity weigh on the population, potentially prompting more restrictions on economic activity.

I now do a small re-evaluation of my view on China, and throw in another China ETF into the analysis mix:

Let's Do It With the GXC Too

The SPDR S&P China ETF (GXC) tracks hundreds of Chinese stocks across all market caps. That way, it is a slightly more diversified index than MCHI. Here's comparison of the ETF compositions:

GXC ETF vs MCHI ETF Composition Comparisons

Sector Weights Comparison

The following shows the sector weights of the GXC and MCHI ETFs, including GXC's net sector overweights vs MCHI:

The overall composition pattern of GXC broadly matches that of MCHI. This is discussed in my analysis of MCHI here . Noteworthily, GXC has less concentration toward communication and consumer discretionary sectors. The reason for this becomes more apparent when we compare...

GXC vs MCHI Top 5 Holdings Comparison

The top five names on both the GXC and MCHI ETFs are large-cap Chinese stocks, including Tencent ( TCEHY ), Alibaba ( BABA ), Meituan ( MPNGF ), China Construction Bank Corporation ( CICHY ), and JD.com ( JD ).

The top 5 stocks in GXC make up 26.18% of the overall exposure, which is 5.92% lower than MCHI's 32.10%. This makes GXC a more diversified ETF than MCHI.

In MCHI, the top 5 names in the communication and consumer discretionary sectors make up almost 70% and 53% of overall sector exposure. Thus, the underweights in these names in GXC contribute toward the overall underweights in communication and consumer discretionary.

COVID is Back in Focus For China

After a long period of a strict lockdown policy, China has started to open up again. Quarantine requirements for travellers is expected to be lifted on January 8 2023.

However, as China moves on to 2023, COVID tags along. In recent times, China has seen a COVID spike driven by a variant:

As of December 30, 2022 China's 7-day moving average for daily new cases was 4,295 . Internally, BBC reports that hospitals being overrun again and crematoriums overwhelmed . They also note that there are concerns from the Chinese public about re-opening of the economy as COVID cases spike yet again. Apparently, major cities such as Beijing and Shanghai are even running out of flu and cold medicines during the chilly winter period.

Will this instigate a return to strict lockdowns? This is the key monitorable for me. I believe the chances of this have increased and hence, this has slightly dampened my earlier bullish outlook on China.

Now let's see what the technicals suggest for GXC and MCHI:

Technical Analysis

If this is your first time reading a Hunting Alpha article using technical analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing the principles of Flow, Location, and Trap.

Read of MCHI

This has not materially changed compared to my analysis of MCHI last week. Please see this post for more details.

Read of Relative Money Flow - GXC

After launching a successful rebound from its previous descent below the lower monthly support, the GXC/SPX500 pair is showing notable signs of a possible flip in trend. However, this newfound bias (trend) has yet to be tested by a pullback.

I expect a retest of the immediate monthly support, with a possible extension to the lower support, followed by a rebound higher. Completion of this move will verify the strength of the trend for me and create a trap confirmation (buy opening). As such, I'm taking a 'hold' stance on the GXC/S&P500 pair.

Read of Absolute Money Flow - GXC

On the standalone GXC ETF, it's a somewhat similar story to the SPX500 ETF pair. The GXC ETF marked an aggressive bullish move over the past two months, leading to a return above the monthly support. However, the ETF seems to have run out of steam after reaching its September high and is likely to make a mild retreat and pullback in the near term.

However, this return to the monthly support at $72.88 could trigger a fresh bullish move toward the $91.89 monthly resistance. Though the overall bias is bullish, I retain a 'hold' stance on the GXC ETF as I anticipate a pullback in the initial month or two of 2023.

GXC expected to underperform MCHI

In the relative chart of GXC vs MCHI, I notice a false breakout trap for the sellers. I believe this will lead to a period of further down movement toward monthly support after a brief test back toward monthly resistance. This would relative underperformance of GXC vs MCHI.

This makes some logical sense; compared to MCHI, GXC is more exposed to sectors such as industrials, which get hit hard more from COVID spikes due to the in-person nature of production. This in contrast to the internet and communications industry, wherein business operations can more easily occur via online means.

Summary

There have been some green shoots for China, but COVID has again thrown a spanner in the works. I have recently scaled out of my bullish MCHI position. I maintain a cautiously optimistic stance, expecting a temporary pullback as the markets wait to see if China will backtrack on its plans to open up the economy again.

For further details see: