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KraneShares Market Volatility Commentary

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What Happened?

Hong Kong and US-listed China stocks sold off on Monday in reaction to the conclusion of China's 20th Party Congress. We believe Tuesday's market decline was due to the following:

  • The promotion of Xi’s allies, indicating a concentration of power.
  • The promotion of supporters of zero COVID policies, suggesting that the rollback of zero COVID policies could take longer than anticipated.
  • The retirement of well-known leaders with previous economic and diplomatic ties to the West, which could lead to deterioration in US-China political relations and issues such as the Holding Foreign Companies Accountable Act (HFCAA) potentially going unresolved.

The market’s reaction is surprising to us, as we already knew President Xi’s allies would be promoted to key roles. The market appears to be assuming that the new political team increases the likelihood of more lockdowns and regulations, thus elevating the risk of investing in China. We disagree.

Why We Are Surprised by the Market’s Reaction:

We believe there is a disconnect between the market's perception of the Chinese economy and what is happening on the ground.

First, we thought President Xi’s two hours speech was encouraging to both the economy (mentioned 65 times during the speech) and modern Chinese society (mentioned 85 times during the speech)1. The two are intertwined, in our opinion; A modernized society requires high-quality jobs, which in turn, require a strong economy. Deng Xiaoping, considered the father of China’s economic success, was also mentioned during his speech as a sign of the continuation of market-friendly policies.

China continues to target the doubling of GDP per capita by 2035, as announced during the recent 5th Plenum back in March. To meet this target, China’s GDP will have to grow by an average of 4% to 5% annually between now and 20352. This will require a strong private sector and consumer market. The Chinese government's initiative of Common Prosperity, which promotes policy to bolster social equality, first requires prosperity.

Now that President Xi has consolidated power, we can expect a unified message and action plan from China. Despite the previous tough stance on internet companies and other industries over the past two years, the Xi administration has demonstrated an ability to adapt to market and economic conditions. The concluding of internet regulations in March of 2022 following Liu He’s famous speech is an example. The pivot on data privacy laws, a precursor for a deal between the China Securities Regulatory Commission (CSRC) and the SEC on auditing Chinese companies listed in the US, is another.

China has been quietly loosening COVID-19 restrictions, albeit slowly, in the run-up to the National Party Congress. Reopening in Hong Kong and Macau, additional international flights to China, and leniency in procedures in high-risk areas all indicate that the Chinese government understands the risk of lockdowns on the economy. China has also been running aggressive campaigns to vaccinate people in China, especially the elderly. The latest reports show that more than 90% of Chinese have received a second vaccination dose, and more than 86% of people over 60 years old have been fully vaccinated.3 However, the unvaccinated percentage represents nearly 100 million people. Furthermore, China Walvax Biotech’s mRNA vaccine, which has already been approved for emergency use in Indonesia, and several other domestic mRNA vaccines could be approved for emergency distribution in China as soon as next month4.

Our cultural analyst, Xiabing Su, who is on the ground in Shanghai, recently interviewed local Chinese people to get their takeaways from the 20th National Party Congress (video below). From these interviews, we can see that local people and businesses are supportive of President Xi's recent initiatives and that China is not as locked down as many might think. Subway stations, street vendors, and commercial offices in Shanghai are full of people. Moreover, the government's focus on healthcare, clean technology, and the real economy look to be positive drivers for China's economy going forward.

Additional Factors & Personnel Changes We Believe Are Underappreciated By The Market:

  • Many investors link the newly promoted Li Qiang, who could become the next Premier, to further strict lockdowns after having presided over Shanghai's strict lockdown this past spring. However, Li Qiang has played a key role in implementing pro-market policies over the years. He has decades of experience governing one of the most market-driven regions in China, including Zhejiang, where Alibaba’s headquarters is located. During his tenure in Shanghai, he oversaw the establishment of the STAR Board, which is a reform to make China’s financial markets more market-driven and innovation-oriented.
  • The CSRC Governor Yi Huiman was also promoted to the new central committee and could become the new head of the People's Bank of China (PBOC). He has long been advocating for financial market reform, having published a market-driven reform agenda for Chinese financial markets in August this year. Working with the US Public Company Accounting Oversight Board (PCAOB) and resolving issues stemming from the Holding Foreign Companies Accountable Act (HFCAA) will be focuses of his.
  • Foreign Minister Wang Yi, who is well-known abroad, has also been promoted to the Politburo.
  • The promotion of China’s new US Ambassador, Qin Gang, may indicate the importance of US-China relations to the new Xi administration. Qin Gang takes a more diplomatic approach to foreign relations compared to his peers in China.
  • China has some of the lowest interest rates in the world currently and has been providing stimulus to businesses.5
  • Alibaba’s Singles Day pre-sales started today. Last year, the festival brought Alibaba and $139 billion in sales.6
  • Mainland investors purchased $852 million worth of Hong Kong stocks overnight on the market selloff.5


  1. De Wei, Low. “Full Text of Xi Jinping’s Speech at China’s Party Congress,” Bloomberg. October 18, 2022.
  2. “China’s Economy Needs to Double in Size to Meet Xi’s Ambitious Plans,” Bloomberg. October 17, 2022.
  3. National Health Commission of China, Press Release, October 13, 2022.  
  4. “A Chinese mRNA COVID vaccine is approved for the first time - in Indonesia,” Reuters. September 30, 2022.
  5. Data from Bloomberg as of 10/24/2022.
  6. Kharpal, Arjun. “China Singles Day 2021: Alibaba, JD smash Singles Day record with $139 billion of sales and focus on ‘social responsibility,’” CNBC. November 12, 2021.