Hi YXI friends,

KWEB, the KraneShares CSI China Internet ETF, has been rising throughout this week, coinciding with an extremely large open market operation in the 7-day reverse repo market by the People’s Bank of China (PBOC) on Wednesday.

Since September, we have seen a few spikes in KWEB. But so far, each time KWEB has sunk into lower lows.

What is in store for Chinese equities in 2025? Will Trump 2.0 hurt the Chinese economy and stocks? When should we expect a more sustained rally? I will attempt to answer these questions in this article. Our aim is to identify the real, key drivers of KWEB, while cutting out the noise.

Any questions - please do not hesitate to ask in the comments.

Table of Contents

• 1. Chinese GDP Sped Up in Q4

• 2. Will Trump’s Trade War 2 Slow China’s Economy?

• 3. How Much Stimulus Is Enough?

• 4. But Is The Rally Sustainable?

• 5. KWEB Technical Analysis

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Chinese GDP Sped Up in Q4

Let’s take the government-published numbers at face value first.

In Q4, China’s GDP grew by 5.4% YoY, at a faster pace than Q3’s 4.6%. Q4 ends the two quarters of sub-5% growth in Q2 and Q3. Most importantly (or magically), it puts the entire 2024 at 5% growth, a red line that the government is determined to defend.

Now, it is nearly impossible to know the “real numbers”. China reports an inflation figure at just 0.1% YoY, slashes the 7-day reverse repo rate to 1.5%, puts the monetary policy at “Moderately Loose”, and announces a 10 trillion RMB debt package for local governments. The Chinese Yuan has also depreciated significantly, approaching the September 2023 level, which was the lowest point against USD since 2018. All of the above are not consistent with a strong economy enjoying 5%+ growth.

2. Will Trump’s Trade War 2 Slow China’s Economy?

During Trump’s 2018-2019 Trade War with China, the Chinese GDP slowed from 6.9% in Q1 2018 to 5.9% in Q3 2019. The decline in net exports dragged the Chinese GDP lower in 2018.

The beginning of the trade war also started Chinese Yuan’s depreciating against the dollar, as annotated in the below chart.

USDCNY (https://www.tradingview.com/x/kxWu1nEn/)

USDCNY rallied from 6.26 to 6.95 within just six months after the trade war started in 2018. A temporary ceasefire near end-of-year provided some relief, while a deterioration in the US-China negotiations in April 2019 started a second phase of Yuan depreciation. USDCNY moved from 6.7 to 7.15 before the US and China found an agreement in August.

USDCNY vs KWEB (https://www.tradingview.com/x/uXCvkY1i/)

Now let’s compare USDCNY with KWEB in 2018-19. They traded like an mirror image.

The chart shows that the same forces are driving the Yuan depreciation and weaker Chinese stocks. In the case of 2018, that was the Trade War.

From this chart alone, it would seem that Trump 2.0 will also be quite damaging on the Chinese economy and bearish on the Chinese stocks, should Trump follow through on his tariff promises.

3. How Much Stimulus Is Enough?

In a previous article on China’s changing Monetary Policy stance (you can access below), we explained how China’s latest 10 trillion RMB debt package works, and why it may be insufficient.

A quick recap - China is allowing local governments to issue 10 trillion RMB of debts over the next 5 years to refinance their high-interest-rate hidden debts.

However, the IMF estimates that the real “hole” is worth 60 trillion RMB in hidden debts. This is why the stimulus package aroused very muted celebrations by markets.

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