China’s Internet stocks have been in a major downtrend over the last 15 months or so. For example, KWEB (KraneShares CSI China Internet ETF), a fund that tracks Chinese companies whose primary business is focused on Internet and web related technology, has plunged more than 65% from its February 2021 high, weighed down by a relentless tech-sector crackdown and pandemic uncertainty.
While the coronavirus issue will not disappear so long as the Chinese government sticks to its “Zero Covid” strategy, there are encouraging signs on the supervisory front. For instance, regulators have signaled recently that stringent oversight on technology companies could end soon amid efforts to restore capital market stability and support growth targets.
After the latest lockdowns hammered the economy, the Chinese Communist Party (CCP) is doing all it can to improve business conditions and the financial system, pledging to step up stimulus to deliver their goals while minimizing the negative impact of the ongoing health crisis.
The Chinese Communist Party will hold its twice-a-decade national congress in November, an event where President Xi Jinping is expected to secure a third term. To prevent any hiccups or an unforeseen leadership challenge, Xi needs to do extensive damage control on the economic front to send the message that the “status quo” is working for everyone.
To create an image of prosperity ahead of the upcoming Party Congress, the government is likely to roll out more growth supportive measures and further reduce regulatory action throughout the third quarter, a scenario that will bolster economic activity and boost earnings of Chinese companies. Against this backdrop, internet stocks could thrive in the coming months, at least until later in the year, when cooler temperatures could trigger another wave of Covid-19 infections and new lockdowns.
Looking ahead to the third quarter, KWEB is at a crucial technical juncture, probing key resistance, ranging from 32.85 to 34.00. Overcoming this area will give a strong bullish signal and could be the start of a rally towards the 40.00 area. On further strength, the focus shifts higher to the psychological 45.00 level, followed by 52.55, the 38.2% Fibonacci retracement of the February 2021/March 2022 sell-off.
KWEB Technical Chart
Chart created with TradingView, prepared by Diego Colman
On the flip side, if KWEB fails to clear resistance at 32.85/34.00 on weekly closing prices and resumes its decline, initial support appears at 29.00 and 24.50 thereafter. If the latter support is breached to the downside, the bullish reversal thesis would be invalidated, a situation that could embolden the bears to launch an attack on the 2022 lows.
