Bearish ETF Bets Most Expensive in Two Months: China Overnight

Options traders are paying the most in two months to protect against drops in the largest Chinese exchange-traded fund in the U.S. on concern a local money-market cash crunch will deepen a slump in Asia’s biggest economy.

The cost of three-month puts on the iShares FTSE China 25 Index Fund (FXI) soared to the highest since September last week, option data compiled by Bloomberg showed. The 4.3-point premium of puts over calls was the widest since April 17. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. slumped the most in four months last week, led by a 16 percent drop in Yanzhou Coal Mining Co. The Shanghai Composite Index fell 0.5 percent to 2,150.76 at 10:43 a.m. local time, extending last week’s losses.

The Hang Seng China Enterprises Index declined the most in a month last week after Morgan Stanley joined banks from UBS AG to Barclays Plc in lowering predictions for China’s economic growth. The Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months and the one-year interest-rate swap climbed to the highest level since 2011 as banks hoarded funds, causing a cash squeeze in the interbank market.

“People are pretty nervous about what we’ll find out once liquidity is withdrawn,” Derrick Irwin, a portfolio manager of the Wells Fargo Advantage Emerging Markets Equity Fund, who helps manage $10.9 billion of assets in Boston, said June 14. “We haven’t seen action from China’s central bank and there’s curiosity from investors on what happens to the liquidity from the Federal Reserve as well. Markets that have really thrived on large amounts of global liquidity have struggled.”

ETF Plummets

The iShares China ETF plunged 4.7 percent last week in New York to $33.98, the steepest slump in a year. The Standard and Poor’s 500 Index lost 1 percent for the week to 1,626.73 as investors scrutinized economic data to determine whether growth in strong enough to prompt the Fed to scale back stimulus measures before its two-day policy meeting this week.

The China-US gauge’s fourth weekly slide in five weeks has left its members trading at 11.8 times estimated profit on average, the lowest level since April, data compiled by Bloomberg show.

Yanzhou, China’s fourth-largest coal mining company, dropped to $8.5 in New York last week, the lowest price since 2009. Trading volume was more than twice the daily average over the past three months.

ADRs of Aluminum Corp. of China Ltd., the nation’s biggest maker of the metal, declined 11 percent last week to $8.37, the biggest slump since November 2011.

The company’s Hong Kong-traded stock was removed from the Hang Seng China enterprises gauge effective after markets close June 14, according to a statement posted on the website of the Hang Seng Indexes Co. May 10 after a quarterly review of its components.

Oil Producers

PetroChina Co. (PTR), the nation’s biggest oil producer, fell 8.2 percent last week to $105.75, the lowest level since June 2010 for the Beijing-based company. China Petroleum and Chemical Corp., Asia’s biggest oil refiner, known as Sinopec, slid 7.3 percent to $92.09 for the biggest weekly loss in four months.

Goldman Sachs Group Inc. reduced the price goal for PetroChina to $129 from $146 on June 13, while cutting the estimate for Sinopec by $17 to $122.

“Even if we see a rebound in the near future after recent weakness in the stocks, it won’t be strong due to the lack of notable recovery signs in the economy,” Qinwei Wang, an economist focused on China at Capital Economics Ltd., a London-based research firm, said by phone June 14. “Big commodity producers won’t perform well as China’s investment slows.”

Yuan Positions

China’s industrial production expanded 9.2 percent in May, compared with a median estimate for a 9.4 percent increase, the statistics bureau reported on June 9. Separate data showed May exports rose 1 percent from a year earlier, the slowest growth in 10 months, trailing the 7.4 percent median estimate of analysts.

Yuan positions at Chinese banks accumulated from foreign-exchange purchases, which helps measure foreign capital inflows into China, rose the least since November, according to data from China’s central bank June 14.

As bad data come in, “investors would say, what if they can’t engineer a soft landing,” Wells Fargo’s Irwin said. “China hasn’t been aggressive recently in increasing the liquidity.”

Spreadtrum Communications Inc. (SPRD), a Shanghai-based mobile-chip maker, surged 10 percent last week to $21.16, its best weekly gain since March. It had the biggest gain on the China-US gauge for the week.

The company boosted its second-quarter sales forecast by as much as 61 percent from a year earlier to $278 million in a statement June 13.

The Hang Seng China gauge in Hong Kong rebounded 0.7 percent today. It posted a weekly loss of 5.1 percent, the biggest in 13 months. Its 12-day decline was the longest since 1993. The Shanghai Composite (SHCOMP) slid 2.2 percent last week, a second week of losses.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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