China-focused ETFs proxies to Northbound Stock Connect activity

On March 1, a flurry of activity engulfed two popular ETFs. One of these was the liquid Lion-OCBC Sec HSTECH ETF which attempts to replicate the performance of the Hang Seng TECH Index. The second ETF was the

Lion-OCBC Sec China Leaders ETF.

This move may have been triggered by China’s February PMI data which points to a stronger-than-expected recovery. “Interest in the China reopening trade saw a bounce after waning in February. The renminbi rallied around 1% on March 1, and Northbound Stock Connect saw RMB7 billion ($1.3 billion) of net purchases (net sales in each of the five days prior),” notes DBS Group Research. “For Asia macro markets, renewed confidence in China’s recovery and its positive spillovers can help to support sentiments against worries of more Fed and ECB rate hikes and higher core rates.”

China’s National People’s Congress (NPC) is scheduled to begin on March 5. According to an update by private bank corporation Julius Baer, investors will keep a close watch on the presentation of key economic targets and policy priorities at the opening session. “We expect a growth target of ‘above 5%’ and continued accommodative and selectively amplified policy support, but no additional broad-based stimulus,” Julius Baer says.

The Government Work Report will outline key economic targets and policy priorities during the NPC. Policymakers adopted a ‘pro-growth’ stance at the Central Economic Work Conference (CEWC) in December 2022 and are likely to reiterate their priority of supporting growth, focusing on supporting domestic demand, stabilising the housing market, and restoring market confidence, Julius Baer adds.

Overall fiscal and monetary policy will likely remain accommodative and at a similar intensity to last year. Notably, the People’s Bank of China adopted an easing policy for interest rates as the Federal Reserve accelerated its hiking cycle.

On the other hand, Julius Baer strategists have said in a report dated March 2 that a broad-based increase in monetary and fiscal policy support to boost growth is unlikely. This is because the Chinese economy is rebounding anyway. If monetary and fiscal policy is to be expansionary at this point, it could fuel inflation — as it did in the developed economies. “A nationwide campaign to support consumers is rather unlikely as the government may fear a surge in inflation as we have seen in other countries after a reopening,” Julius Baer says.

Instead, the government will rather focus on targeted support for manufacturing and infrastructure investment is likely to continue, while consumption will be supported through seective measures (for example, discounts or consumer vouchers in specific sectors such as home improvement, new energy vehicles, or elderly-care services, as outlined by the CEWC).

Based on the estimates, the Chinese government may look to policies to stabilise the real estate sector, as real estate comprises around 30% of the Chinese economy. Ongoing support for the completion of stalled housing projects, financing of developers, and restoring the confidence of homebuyers is therefore likely. But structural imbalances and the risk of excessive debt remain a concern, Julius Baer adds.

HSTECH and China Leaders ETFs provide the best proxies for any rebound in China. While both ETFs are tech-heavy, China Leaders also comprise financial services companies such as Bank of China, Industrial and Commercial Bank of China, Bank of Ningbo and Ping An Insurance.