Bearish ETF Bets Cost Decline on Growth: China Overnight
Options traders are paying the least in four months to protect against drops in the largest Chinese exchange-traded fund in the U.S. on prospects a recovery in the world’s second-largest economy will be sustained.
The premium of three-month puts on the iShares China Large-Cap ETF over calls was 3.1 points on Sept. 26, the smallest since May 21, options data compiled by Bloomberg showed. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped 0.4 percent last week, led by E-House China Holdings Ltd. (EJ) and China Unicom (Hong Kong) Ltd.
The Hang Seng China Enterprises Index is set for a 13 percent rally this quarter, the biggest in 2013 after data from exports to manufacturing showed faster-than-estimated expansion. The China-US gauge has gained 19 percent over the past three months, poised for the best quarter since 2010. President Xi Jinping is expected to push forward more detailed economic plans during the Communist Party meeting in November.
The options showed “investors’ short-term concerns about the economy have lessened after latest macro data showed a pickup in the economy,” Tan Chiheng, an analyst at Granite Point Capital Inc. (PTCI), which invests in Chinese equities, said by phone on Sept. 27 from Boston. “People also expect policy makers to roll out more reform measures that are positive to the economy in the upcoming November meeting.”
Implied volatility, used to gauge the cost of options, for three-month contracts with an exercise price 10 percent below the China ETF cost retreated 12 percent this month to 24.5 Sept. 27, the lowest since June 4. The measure for calls 10 percent above slipped 10 percent to 21.2.
The China ETF has jumped 7.2 percent this month, set for the largest monthly rally since December. The fund slipped 0.7 percent to $37.65 on Sept. 27.
Chinese stocks traded in New York followed U.S. equities lower last week after the U.S. Senate voted to finance the government through Nov. 15 after removing language to defund President Barack Obama’s health-care law, putting pressure on the House to avoid a federal shutdown set to start Oct. 1.
E-House, China’s biggest real estate information website, slid 6.9 percent last week to $9.03, trimming its rally this month to 49 percent. American depositary receipts of China Unicom (CHU), the nation’s second-biggest wireless carrier, dropped 5.2 percent for the week to $15.44, paring its gain in September to 2.6 percent.
Trina Solar Ltd. (TSL), a Baoding, China-based solar-panel maker, surged 29 percent last week to a two-year high of $14.83. Yingli Green Energy Holding Co., the biggest panel maker globally, soared 20 percent for the week to $6.73, the highest level since August 2011.
Deutsche Bank analyst Vishal Shah raised his recommendations on both Trina and Yingli to buy from hold in a note on Sept. 27. He lifted a price target for Trina to $18 from $11.50, and that for Yingli to $8 from $5.
RDA Microelectronics Inc. (RDA), a Shanghai-based semiconductor components maker, jumped Sept. 27 after saying it received a non-binding takeover proposal from state-owned Shanghai Pudong Science and Technology Investment Co. for $15.50, which represents an 11.7 percent premium to the closing level the previous day.
Its ADRs climbed 11 percent last week to $15.54 in New York, the highest level since January 2011. Trading volume surged to 11 times the three-month average on Sept. 27, data compiled by Bloomberg showed.
The offer appears “conservative” relative to the target price of Topeka Capital Markets Inc., analyst Suji De Silva wrote in a note Sept. 27. He forecast the bidding price may get a “bump” closer to Topeka’s price estimate of $17.
China will allow trial convertibility of the yuan under the capital account in a free trade zone being established in Shanghai, the government said Sept. 27 in a statement on its website. Citigroup Inc. and Bank of China Ltd. announced they will participate in the trade zone, the 11-square-mile experiment in more relaxed financial and investment controls that was inaugurated yesterday.
The two banks were among the first to announce their participation in the zone, which opens Oct. 1 with the aim of creating a more efficient and open economic system, Commerce Minister Gao Hucheng said at an opening ceremony.
The area is a testing ground for free-market policies that Premier Li Keqiang has signaled he may later implement more broadly in the world’s second-largest economy. Li and President Xi are expected to seek support for plans to reduce the government’s hand in the economy and financial system at a Communist Party plenum this November.
Alibaba Group Holding Ltd.’s planned initial public offering in New York will help Chinese Internet companies from Sina Corp. to Baidu Inc. to extend rallies, Michael Kass, a New York-based portfolio manager at Baron Capital Inc., said in a phone interview Sept. 25.
“China has a lot of tailwinds over the balance of the year, and I expect markets to perform well,” Eric Brock, who helps oversee $4.2 billion as a portfolio manager at Clough Capital Partners, said by e-mail from Boston Sept. 27.
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