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China and Reopening

China closed its borders to the outside world for over 1,016 days and locked down many of China’s 1.4 billion people. On Sunday, January 8, 2023, China eased its zero-Covid policy and reopened its borders. After nearly three years, the social and economic experiment of self-isolation without precedent ends.


What does the reopening mean for China and the rest of the world?


As China eases its draconian zero-Covid policy by relaxing international travel rules, reducing quarantine requirements, and Covid testing rules, the reopening will likely have ramifications for its domestic and global economy. Experts suggest China’s GDP growth will soon rebound from the street consensus call of 4.8%.


Many investors expect consumer discretionary industries such as retailing, media and entertainment, gaming/hotel, and travel/transportation will benefit the most as Chinese consumers return to the marketplace. However, many investors also believe Chinese stocks may experience high volatility due to continuing geopolitical, regional, and macroeconomic uncertainties.


Investors looking to return to the Chinese stock market may want to venture into China-related ETFs. However, there are over 59 China ETFs currently available for trading. It is best to initially focus on the large and more liquid ETFs such as iShares MSCI China ETF (MCHI – $52.98 and 8.583B market cap), KraneShares CSI China Internet ETF (KWEB – $35.04 and 7.499B market cap), and iShares Trust – China Large-Cap ETF (FXI – $31.59 and 5.781B market cap).


FXI is one of the oldest China-focused ETFs on the market, which began trading in late 2004. The ETF offers a respectable 2.34% annual dividend yield and has exposure to the fifty (50) Chinese stocks that trade on the Hong Kong Stock Exchange.


The top sectors are Finance (29.78%), Technology (19.11%), Retail Trade (15.66%), and Transportation (8.62%). The top 10 holdings are BABA (9.52%), TCEHY (9.13%), MPNGF (8.63%), JD (6.21%), CICHY (4.76%), PNGAY(4.53%), IDCBY (4.37%), BIDU (3.94%), WXXWY (3.37%), and NTES (3.29%).


The technical for FXI are as follows:


Feb 2021 downtrend breakout above 29 hints at a trend reversal and signals the start of an intermediate-term FXI recovery. The sustainability of the recovery still depends on the outcome of the tests of several crucial resistances.


Formidable intermediate-term resistance resides at 33.5-34, coinciding with the neckline and the pivotal Apr/Jun 2022 highs. A breakout above 34 confirms a 1-year head and shoulders bottom and renders a rally of 13.5 points or a target at 47-47.5.


A convincing move above 32.65, or the 38.2% retracement from Feb 2021-Oct 2022 decline, confirms a recovery to 36.42 (50% retracement). Above this to 40-41 (61.8% retracement and the Sept/Oct 2021 highs) and 42-43.5 (2019 and first half of 2020 highs).


Initial support rises to 28.5-29 (extension of the 2021 downtrend breakout and the 200-day ma). Secondary support also moves to 26.5-27 (50-day ma and May 2022 or the left shoulder 2). Intermediate-term support resides at 24.5-25.5 (Mar 2022 low or the left shoulder 1, and late-Nov 2022 low or the right shoulder 1). The Oct 2022 reaction lows or the head at 20.44-20.50 is pivotal long-term support.


Source: Chart courtesy of StockCharts.com

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