How China's COVID-19 Policy Impacts Stocks

Admirable as that may be, the virus isn’t proving cooperative. However, China remains the only country with a zero-COVID policy. It takes pandemic defense so seriously that it recently unveiled a vaccination effort for children three years old and up.

For investors, there are implications that come along with Beijing’s strong anti-COVID stance. Those actions can affect stocks in the world’s second-largest economy as well as exchange traded funds, including the WisdomTree China ex-State-Owned Enterprises Fund (CXSE A-). CXSE experienced some headwinds at the hands of Beijing’s escalated regulatory regime this year, prompting investors to have understandable concerns regarding China’s coronavirus policy.

“The aggregate service sectors, which are most impacted by lockdowns, are still expanding, after a brief contraction in September. At this point, the energy crunch and real estate sector slowdown likely have a greater impact on the Chinese economy than other factors like its Zero-COVID-19 policy,” notes Liqian Ren, WisdomTree director of modern alpha.

CXSE, which tracks the WisdomTree China ex-State-Owned Enterprises Index, allocates just 2.81% of its combined weight to energy and real estate. That’s a good thing because, as Ren points out, those groups still face challenges.

“However, there are new headwinds for energy and real estate, both of which are in a downtrend. The uncertainty for 2022 growth mostly comes from these two, not COVID-19, unless a significantly worse variant emerges,” Ren adds.

When coronavirus cases rise in various Chinese cities and regions, economic activity in those areas slows. However, CXSE might offer some workaround opportunities in those scenarios — if regulatory pressures abate — because the bulk of the fund’s holdings are engaged in online activities such as internet search, gaming, retail, social media, and more.

“The Baidu Congestion Index has shown that when a city reports COVID-19 cases, congestion is lower than the same month a year ago, suggesting a negative impact on the service industry. But the number of cases is low enough that, at any given time, the actual total number of people impacted is not widespread,” says WisdomTree’s Ren.

Looking ahead to how CXSE could fare in 2022, the biggest issue facing the Chinese economy is likely GDP growth, not COVID-19 cases counts. Beyond that, the energy and real estate sectors are far from out of the woods, indicating that CXSE could be one of the more credible China ETF ideas next year.

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