Bearish Bets on China Soar to 15-Month High as U.K. Votes

China Stimulus Measures Boost Debt With Economy
  • Options put-call ratio on country-focused ETF surges
  • Skepticism contrasts with improving mood in emerging markets

As the dust settles on the U.K.’s European Union referendum and the Federal Reserve reaffirms its dovish policy, options traders are betting China’s economic slowdown is the major unresolved risk for emerging markets.

The ratio of bearish to bullish option‘s on the largest exchange-traded fund tracking Chinese shares listed in Hong Kong climbed to the highest level since March 2015, according to data compiled by Bloomberg. That reflects a rush for buying protection against losses in an ETF that’s already witnessed outflows of $1.6 billion this year. It also contrasts with options traders’ optimism on emerging markets, where the put-call ratio is declining.

Shanghai and Hong Kong are among the world’s 10 worst-performing markets this year as the yuan declines and sluggishness in the second-biggest economy drives a shift away from riskier assets. An equity rebound in March spurred by government stimulus proved short-lived as subsequent data showing shrinking private investment and worse-than-estimated credit growth clouded the outlook. MSCI Inc. denied Shanghai stocks entry into its indexes, saying policy makers need to make the A-share market more accessible.

“If things go wrong in China, it affects everyone,” said Mark Williams, chief China economist at Capital Economics in London. “There was a burst of optimism two months ago that growth was beginning to accelerate. Those hopes of acceleration have faded away as more data came in. Stimulus is not having much of an impact.”

China is grappling with how to maintain a 6.5 percent annual average growth through 2020 while preventing the debt burden from spiraling. The nation’s near-term outlook is buoyed by policy support even as its medium-term prospects become clouded by rapidly rising credit, excess industrial capacity and financial-sector risks, according to the International Monetary Fund.

The open interest on put options, contracts that give their owner the right to sell the ETF at a predetermined price on an agreed date, was 1.9 times that on bullish call options as of June 21 on the iShares China Large Cap ETF. The fund witnessed the biggest investment outflows since 2009 on May 4 and the worst degree of short-selling in two years at the start of this month.

The put-call ratio on the iShares MSCI Emerging Market ETF has fallen to 1.31 from a high of 1.71 in January. The fund has also attracted a net $467 million this year.

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