Asia's stock markets now slid toward a second month of losses in a row. Even the shining star, the Nikkei, paused its rally. This all comes in the wake of weak Chinese factory activity, which has sparked serious doubts about the post-pandemic recovery in the world's second biggest economy. The MSCI's broadest index of Asia-Pacific shares outside Japan has lost about 2.4% in May, as hopes for a robust Chinese rebound have gone sour.

iShares MSCI All Country Asia ex-Japan ETF (AAXJ Quick QuoteAAXJ - Free Report) was up 1.8% past month (as of May 30, 2023). The fund has a P/E of 12.35X, which talks about still-cheaper valuation.

Weakening Chinese Economy: A Cause for Concern

Weak economic data from China have exacerbated worries about a global slowdown, contradicting any optimism derived from signs of easing inflation in some of the major euro zone economies. The Chinese manufacturing activity contracted faster than expected this month due to weakening demand. This comes as the official manufacturing purchasing managers' index (PMI) slumped to 48.2 against a forecast of 49.4.

Ripple Effect: Impact on Other Markets

The disappointing economic outlook in China has filtered through to other China-sensitive assets. The Australian dollar is sliding towards a fourth consecutive monthly loss, with Aussie stocks eyeing their worst month since February with a 2.4% drop. A tourism-led rally for Thailand's baht and stock index has failed to arrive. Hong Kong's Hang Seng index is down 8% in May, underscoring the widespread regional fallout.

Japan's Market: A Ray of Hope?

In contrast to this general trend, Japan's market has shown some resilience. The benchmark Nikkei dropped by a mere 0.8%, capping a 7.7% monthly gain that has driven the index above 31,000 to its highest levels in over 30 years.

Value Play or Value Trap?

The recent slump in Asia's stock markets, driven by China's weakening economy, raises the question for investors: is this a value play or a value trap? Inverse China ETFs rallied past week (as of May 30, 2023).

ETFs in Focus  

Direxion Daily FTSE China Bear 3X Shares (YANG Quick QuoteYANG) – Up 11.5% Past Week

ProShares UltraShort FTSE China 50 (FXP Quick QuoteFXP) – Up 8% Past Week

ProShares Short FTSE China 50 (YXI Quick QuoteYXI) – Up 4% Past Week