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China’s Already Weakened Economy Hit by Housing Market Crisis – Is There a Way Out?

December 08, 2023
A group of white homes and apartment buildings sprouting from the Chinese flag

Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

The optimism at the start of this year about a post-COVID boom in China feels like a distant memory as the nation’s economy slides further toward a contraction. Youth unemployment rose so high that Chinese authorities have stopped releasing age-related job data. A property crisis years in the making is leaving homes unfinished or unsold and investors unpaid—and now threatens other sectors of the economy (Reuters). With such a grim outlook in China right now, are there any catalysts traders can look forward to?

A Domino Effect: How the Property Crisis Casts a Long Shadow

Since 2021, a staggering 40% of China's home sales have been linked to property companies that have defaulted. The ripple effect is palpable as home sales plummeted by a staggering 29% (Trading Economics) across major cities. The government's imposition of stringent lending regulations on already highly leveraged developers pushed these companies into a cash crunch, struggling to cover their towering debts.

Economists now worry about the ripple effect this could have across the financial sector as lenders are unable to recover the capital they poured into housing developers. There is also concern that the subsequent slowdown in new construction could impact commodities as construction materials see a potential dip in demand while developers attempt to offload the glut of vacant properties already built.

In a bid to stabilize the freefalling housing market, China made bold moves, easing home-buying requirements. Minimum down payments for mortgages were slashed from 30% to as low as 20% for first-time buyers. Interest rates on new mortgages saw a significant dip of up to 4%, and existing homeowners found themselves in a position to renegotiate their rates (Trading Economics). The underlying aim? To inject life into the housing market, hoping the freed-up finances for homeowners would trickle into other sectors, igniting spending.

While it’s too early to tell whether those policy moves will be enough to do so, traders should keep an eye out for monthly and quarterly updates from the National Bureau of Statistics of China.

For bullish traders, these reports play a pivotal role in this economic narrative. They act as a barometer, offering a glimpse into the state of China's housing market. Moving forward they could be signs of stabilization. For bearish traders, if these reports don’t show signs of recovery, the growing pessimism could create some opportunities to trade the inverse.

The Post-COVID Boom That Never Came Might Just Be Delayed

While the long-anticipated reopening of China’s economy was expected to trigger a boom in demand, the relatively lackluster spending that the nation actually saw has turned many traders bearish on China. But the new policies meant to support the housing market also came alongside broader economic stimulus measures that could help bring about a belated recovery in consumer demand.

For example, maximum tax deductions for childcare and child education costs will double while the deduction for elderly care will increase by half (Gov.CN). The tax breaks are among the latest in a series of policies aimed at stimulating the economy over the last few months (Reuters).
It’s also worth noting that the economic slowdown is not a contraction. China’s Gross Domestic Product (GDP)* rose 6.3% year-over-year in the second quarter, which fell short of analyst forecasts but still far outpaces the 2.6% growth in the U.S.’s GDP or the meager 0.5% growth in the EU’s GDP over the same time period (Trading Economics).

That China’s economy is resilient enough to still grow in spite of the recent crises gives bullish traders reason to go against the grain and find yield by betting on China’s ability to surprise pessimistic analysts. However, it may still be a while before Chinese stocks reflect that resilience.
In either case, traders will want to watch GDP data and monthly unemployment data over the next couple of months.

Consider Trading the Chinese Economy with Direxion’s YINN And YANG

Wherever you think China’s economy is headed in the coming months, the Direxion Daily FTSE China Bull 3X Shares (Ticker: YINN) and Daily FTSE China Bear 3X Shares (Ticker: YANG) give you two powerful tools for trading those assumptions. YINN and YANG seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), respectively, of the performance of the FTSE China 50 Index*, giving traders a chance to attempt to magnify the daily performance of each trade they make, whether bullish or bearish.

The FTSE China 50 Index is made up of the 50 largest Chinese companies with the most liquidity currently trading on the Hong Kong Stock Exchange. As of September 30, 2023, that includes the following top 10 holdings:

INDEX TOP TEN HOLDINGS % (as of 9/30/2023)
Tencent Holdings8.77
Alibaba Group8.69
Meituan8.45
China Construction Bank Class H6.17
Baidu Class A4.47
Industrial Commercial Bank of China Class H4.44
Netease Inc4.29
Ping An4.19
JD.com4.07
BYD3.53

To view the Funds’ full holdings, click here. Holdings subject to risk and change.

With less than 3% of the index exposed to the real estate sector, we believe that this is one way for bullish investors to minimize their exposure to the property crisis as they trade their overall bullish outlook on the rest of China’s economy. However, it’s still important to account for any ripple effects that may hit the financial sector or the impact on consumer spending more broadly.

It’s also important to note that leveraged ETFs like YINN and YANG magnify losses as much as they magnify gains. So traders still need to be careful about how they use these in their trading strategy. But, when used carefully for short-term trades, YINN and YANG could be a useful pair of tools for capturing either side of the swings in China’s ongoing attempt at economic recovery.

*Definitions and Index Descriptions

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

The FTSE China 50 Index (TXIN0UNU) consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange as determined by FTSE/Russell. Constituents in the Index are weighted based on total market value, so that companies with larger total market values will generally have a greater weight in the Index. Index constituents are screened for liquidity and weightings and are capped to limit the concentration of any one stock in the Index. One cannot directly invest in an index.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to Chinese securities, including Chinese Government Risk, Chinese Markets Risk, Chinese Currency Risk, and Hong Kong Securities Risk. The Chinese economy is generally considered an emerging market and can be significantly affected by economic and political conditions and policy in China and surrounding Asian countries. Securities from issuers in emerging markets face the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market shutdown and more government limitations on foreign investments than typically found in more developed markets. Additional risks include, for the Direxion Daily FTSE China Bull 3X Shares, Daily Index Correlation Risk and for the Direxion Daily FTSE China Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

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