How To Navigate China's Post-COVID Market Rally

China is the world’s second-largest economy after the United States, making the market a potential opportunity for traders looking to diversify their trades—especially now as the S&P 500® Index struggles to break out of bear market territory. While the U.S. market is bearish, China has been enjoying a healthy rally, with Hong Kong’s Hang Seng Index* soaring 50% in the three month period ending January 31. Here are some potential tips for traders looking to capture yield from China’s post-COVID recovery.

China’s Policies Supporting Market Growth Could Help Maintain Bullish Momentum

After three years of lockdowns meant to curb COVID cases, China officially dropped all COVID-related restrictions and reopened the economy. The reopening triggered an immediate rally across Chinese stocks last year that continued almost unabated until the end of January, when it began to level off.

But China’s economy has yet to recover its full pandemic era losses, which has some analysts optimistic that the rally still has plenty of room to grow.

The nation’s retail and travel sectors are anticipated to see the strongest growth this year as Chinese consumers look to spend a significant amount of savings accumulated over three years of repeated lockdowns.

Keep a Close Watch on U.S.-China Relations

While China’s economy has a strong positive outlook, momentum could be stymied if the simmering tensions between China and the U.S. boil into trade sanctions. The recent spy balloon debacle may have been the most public display of escalating tensions but the two nations have been battling over multiple geopolitical issues lately, which has traders cautious.

That includes concerns that China may choose to provide material support to Russia in the Ukraine invasion—though Beijing has said it’s committed to peace talks. Another source of tension is the issue of Taiwan’s independence and the U.S. military presence there.

In February, U.S. officials said they were planning to quadruple the number of U.S. troops stationed in Taiwan where they would help train the Taiwanese military. The expanded military presence is an effort to fend off a possible Chinese attack on the island nation, which China views as a breakaway province that should be brought under Beijing’s control.

While the countries continue to butt heads, neither has moved toward sanctions just yet but if they do, the impact on the stock market could be substantial, so traders may want to be ready to switch to a bearish strategy if that happens.

Seek Exposure to Chinese Stocks and Potentially Magnify Results by Trading Leveraged ETFs

Many traders opt for ETFs, rather than directly trading stocks on the Hong Kong Stock Exchange because it’s a way to gain exposure to Chinese securities that traders otherwise might not be able to trade outright due to foreign investment restrictions.

The Direxion's Daily FTSE China Bull (YINN) and Bear (YANG) 3X Shares, seek daily returns that are 300% or -300%, respectively, of the return of the FTSE China 50 Index*, giving traders a chance to not only gain exposure to the market but potentially magnify the performance of each trade they make.

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.