Hong Kong Volatility at Year Low Versus VIX: China Overnight

The cost of protecting against losses in Chinese stocks relative to U.S. equities fell to a one-year low on prospects the slowdown in the world’s second-largest economy will ease.

The AlphaShares Chinese Volatility Index, derived from options on companies listed in Hong Kong, traded at 18.61 on Oct. 31, 1 percentage point above the Chicago Board Options Exchange Volatility Index and the smallest gap since September 2011. The premium has narrowed from as much as 1.43 percent on Sept. 9. Both the Hang Seng China Enterprises Index and the iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., touched the highest level since May last week.

The yuan strengthened to a 19-year high on Oct. 29 and monetary authorities in Hong Kong intervened to curb gains in their dollar as flows into Chinese equity funds surged to the most since 2008 in the week to Oct. 24, EPFR Global data showed. Improving reports on industrial production, manufacturing and retail sales since Oct. 18 have bolstered prospects the world’s second-largest economy may be recovering after a seven-quarter slowdown.

“The fear indexes such as volatility are down as some real optimism about the Chinese economy appears to be coming back,” Kevin Carter, co-founder and chief executive officer of Baochuan Capital Management LLC, which oversees about $325 million, said by phone from San Francisco on Nov. 2. “Over the last eight weeks a switch got turned on regarding China and as the market has gone higher, it reinforced a more favorable outlook.”

Faster Growth

The Bloomberg China-US Equity Index of the most-traded Chinese shares in New York advanced 0.5 percent to 94.81 last week, after posting a 2 percent increase in October. The iShares FTSE China 25 Index Fund gained 1.4 percent to $37.46 in a week shortened by Hurricane Sandy.

The Hang Seng China Enterprises Index of mainland companies, also known as the H-share index, added 3.7 percent to 10,833.73 last week. The measure rose more than 20 percent from a Sept. 5 low, indicating the start of a bull market. The Shanghai Composite Index climbed 2.5 percent to 2,117.05. The Standard & Poor’s 500 Index added 0.2 percent to 1,414.20.

Growth in Chinese power consumption will rebound in the last three months of 2012 as the nation recovers from a seven-quarter slowdown, the China Electricity Council said on Oct. 30.

The Purchasing Managers’ Index rose to 50.2 in October from 49.8 in September, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Nov. 1. That matched the median forecast in a Bloomberg News survey of 30 economists. A reading above 50 indicates expansion.

‘Rally Further’

A separate purchasing managers’ index for the nation’s services industries increased to 55.5 last month from September’s 53.7, the statistics bureau and logistics federation reported on Nov. 3. The two PMI measures follow government data showing industrial production rebounded in September and retail sales surged.

“Bearish sentiment toward Chinese stocks has been reversed and this is the beginning of a rally,” Michael Ding, lead manager of the China Region Fund at U.S. Global Investors Inc., which oversees $2.2 billion, said by phone on Oct. 26 from San Antonio, Texas. “Inflowing funds will help Chinese stocks to rally further as we’ve seen stronger figures in many areas over the last two weeks.”

Chinese stocks traded in New York extended a third month of gains last week, as Melco Crown Entertainment Ltd. rallied on October’s record gaming revenue in Macau.

Golden Week

American depositary receipts of Hong Kong-based Melco increased 3.7 percent in the week to $14.89, the highest level since May 2. Seaspan Corp. climbed 8.2 percent to $17.11, the biggest advance since June, as the container ship operator reported a third-quarter profit after losses in the same period last year.

Macau casino revenue increased to 27.7 billion patacas ($3.5 billion) in October, topping a record set in the same month last year, as promotions during the Golden Week holiday attracted more Chinese tourists to the world’s biggest gambling hub. China is building a high-speed rail and bridge linking Macau with Hong Kong and the mainland as the nation strives to spur economic growth.

“Melco is a very well-run casino that has benefited from growth in Macau and will continue to benefit as new infrastructure makes it easier to get to the island,” Lawrence Haverty, a portfolio manager at Gamco Investors Inc., which oversees $36.7 billion in assets including Melco, said by phone Nov. 2 from Rye, New York. “The long-term story for the casino stocks there is very powerful.”

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