China’s world-beating stock rally is dividing traders in the U.S. options market.
Demand has exploded in the past month for contracts that protect investors against losses as well as for those that profit from more gains in the largest U.S. exchange-traded funds tracking Chinese companies. It reflects a divided market outlook after the rally in mainland equities spread to their dual-listed peers in Hong Kong, stoking a 21 percent surge in the Hang Seng China Enterprises Index in the last 30 days.
Bears see Chinese stocks as vulnerable to a selloff after the Shanghai Composite Index more than doubled in the past year despite a weak business outlook and warnings from regulators about investor mania. Bulls think equities will keep gaining because the government has just started a cycle of monetary easing designed to prop up an economy that is set to expand at the slowest pace since 2009.
“There is still a lot of conflict in the investment community with regard to the legitimacy of the rally,” Mark Luschini, chief investment strategist in Philadelphia at Janney Capital Management LLC, which oversees about $68 billion, said by phone. “Is it purely speculation and therefore vulnerable to get smashed, is there a disconnect between the rally in the equity market and what it appears to be a soft growth in China?”
Ownership of puts to sell the $7.4 billion BlackRock Inc. iShares China Large-Cap ETF, which tracks so-called H shares in Hong Kong, jumped 46 percent in the past 30 days to 2 million contracts, close to a five-year high. The number of calls to buy the fund more than doubled to 1.7 million.
Bearish options bets on the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, which tracks mainland stocks, climbed 92 percent during the one-month period, while bullish wagers gained 71 percent, data collated by Bloomberg showed.
The two ETFs have rallied more than 19 percent since March 24, mirroring gains in the Hang Seng H-share and Shanghai Composite benchmarks. Chinese stocks are the best performers among the world’s major indexes, according to data compiled by Bloomberg.
While investor expectations for government measures to stimulate growth helped boost China’s $7.7 trillion equity market, policies including monetary easing have yet to revive the nation’s economy. An April manufacturing gauge dropped to a 12-month low even as the central bank has cut interest rates twice since November and reduced lenders’ required-reserve ratios amid the weakest expansion in 24 years.
The stock rally has prompted authorities to roll out measures this year that signal an effort to temper gains and prevent another boom-and-bust cycle after a record number of novice investors entered the market. China’s securities regulator started a campaign on Friday to crack down on stock-market manipulation and insider trading, the latest effort to reduce risks.
The China Securities Regulatory Commission will target trading by brokerage employees using non-public information, and market manipulation, including of futures prices, the CSRC said in a Friday statement on its website.
Chinese officials are trying to find a balance between weeding out speculators and encouraging the stock market to play a bigger role in helping companies raise funds as the government reins in credit expansion. The CSRC and central bank Governor Zhou Xiaochuan have endorsed the flow of funds into equities.
“If it rises too fast, too soon, ultimately it will cause a collapse, and that’s what they are a bit concerned with,” Ankur Patel, chief investment officer at R-Squared Macro Management LLC, said by phone last week. They are trying to “slow down the activity by having these macro-prudential measures in place.”
The iShares China Large-Cap ETF gained 3.8 percent last week to $51.92 and reached the highest level since 2008 on April
22. Deutsche Bank AG’s $1.2 billion A-share ETF advanced to a record $49.24 on the same day, jumping 9.3 percent over the five days ended April 24. They rose 1.5 percent and 1.7 percent respectively at 10:20 a.m. on Monday in New York.
Earlier this month, authorities banned a source of financing for margin trades, while CSRC Chairman Xiao Gang said new investors should be cautious and evaluate stock market risks. In January, the regulator announced a round of checks into margin lending by brokerages.
The latest crackdown comes after the benchmark Shanghai Composite Index plunged as much as 2.2 percent on Friday amid speculation the government would increase a stamp duty on stocks. The gauge pared losses, ending the day down 0.5 percent and cutting its advance for the week to 2.5 percent, after the CSRC denied the rumors.
“Some investors have expressed concern that China equities have reached their peak,” Aaron Dillon, a fund manager at Krane Fund Advisors LLC in New York said by e-mail. “We believe that China equities have plenty of room for growth.”