China’s Stock Traders Get Whiplashed Most Since 1995

Chinese stock traders haven’t been whipsawed like they are now in almost 20 years.

Back then, it was speculation that Deng Xiaoping, the leader who opened China up to foreign investment, was dying. Today, it’s the country’s faltering economic expansion.

The growth concerns pushed the Hang Seng China Enterprises Index to the worst selloff among the world’s major markets over the first 11 weeks of the year, only to give way to a 13 percent surge that’s topped all peers. The benchmark gauge’s relative strength index, a momentum indicator used to identify market turning points, went from sending a buy signal to sell signal in just 13 days.

“Sentiment changes quickly,” said Kelvin Wong, a Hong Kong-based analyst at Bank Julius Baer & Co., which has about $287 billion under management.

Traders are setting themselves up for more disappointment by turning bullish now as a bet the government will add stimulus to shore up growth, according to Wong and analysts at Standard Chartered Hong Kong Ltd. Short sellers have cut bearish wagers by 65 percent, while exchange-traded fund investors turned into buyers from sellers and options traders became the most optimistic since December.

“The rally will be quite short-lived,” Wong said. Speculation that the central bank will loosen monetary policy as part of a broader stimulus package is misguided, he said.

Short Interest

The Chinese stock index fell 0.7 percent to 10,307.56 at the midday break in Hong Kong, snapping a five-day winning streak, after the nation’s exports and imports unexpectedly fell in March. The gauge pared a drop of as much as 1.5 percent after Premier Li Keqiang said China plans to link the exchanges in Shanghai and Hong Kong, spurring speculation the cities are close to an agreement on mutual market access.

The Hang Seng China’s 14-day relative strength index increased to 70.6 on April 8 and was at 72.1 yesterday. A level above 70 indicates shares should be sold. The measure declined to 29 on March 20, below the 30 threshold that some traders use as a signal to buy.

Since 1995, the Chinese stock gauge has taken an average 45 days to swing between so-called oversold and overbought levels, according to data compiled by Bloomberg. It tumbled 9.6 percent in April 1995 amid speculation Deng’s health was deteriorating. The gauge rose 16 percent that May before resuming declines to a record low in November. Deng died two years later at 92.

‘Off Guard’

Short interest in the U.S.-listed iShares China Large-Cap ETF dropped to about 10 percent of shares outstanding as of April 8 from a record 29 percent on March 24, according to estimates from Markit. The five largest Chinese ETFs had combined net inflows of about $116 million on April 8, snapping five straight days of outflows, data compiled by Bloomberg show.

Calls betting on a 10 percent rise in the Hang Seng China index cost the same as puts predicting a 10 percent decline yesterday for the first time since December, according to data compiled by Bloomberg. The bearish two-month contracts were about 6 points more expensive three weeks ago.

The rally “caught investors off guard,” said David Welch, the head of equity sales trading at Reorient Group Ltd. in Hong Kong. “Positioning was too one-sided.”

More Stimulus

Concern that policy makers will miss their 7.5 percent growth target this year dragged down the Hang Seng China gauge by 20 percent from Dec. 2 through March 20, the threshold that signals a bear market. Fixed-asset investment rose in January and February at the slowest pace since 2001 while industrial production trailed estimates and exports fell by the most since 2009. Even if the government achieves its 7.5 percent target, it would still be the slowest expansion since 1990.

Premier Li Keqiang is trying to balance sustaining growth and employment with reining in a credit surge and curbing pollution that’s shrouded cities across the nation. China’s debt-to-GDP ratio is already higher than India’s, Brazil’s and Russia’s and JPMorgan Chase & Co. says it’s surpassed the level in Japan that preceded that nation’s financial crisis.

Chinese policy makers accelerated construction projects, boosted spending on railways and eased funding restrictions for financial companies, as part of its measures to accelerate growth. The move has benefited companies tied to infrastructure and lending.

Gloomy Outlook

China Railway Group Ltd., the country’s second-biggest builder of railways, surged 22 percent since March 20 through yesterday, the most among the 40 members on the Hang Seng China index. China Merchants Bank Co. climbed 21 percent while Yanzhou Coal Mining Co. jumped 15 percent after sinking to its lowest level in five years last month.

The Hang Seng China index is valued at 7.6 times reported earnings, near its cheapest level in 12 years and a 54 percent discount to the MSCI All-Country World Index.

As long as growth remains in an acceptable range, the government should never implement short-term stimulus, Jia Kang, director of the ministry of finance’s fiscal-science research institute, said in a panel discussion at the Boao Forum on China’s Hainan province yesterday.

Speculation the government will unveil a stimulus package is “misleading” and there is “no sign” of a shift in monetary and fiscal policy, according to a commentary by the official Xinhua News Agency on April 7. The central bank last lowered benchmark lending rates in July 2012, while it cut the amount of cash that banks must set aside as reserves in May that year.

Trade Shrinks

“People expect policy loosening but they will end up being disappointed,” Ryan Tsai, an Asian equity strategist at Standard Chartered, said by phone from Hong Kong. “The outlook for the economy is still pretty gloomy. In the near term, there’s a possibility the market will fall back again.”

Overseas shipments declined 6.6 percent from a year earlier, the customs administration said in Beijing today, compared with the median estimate for a 4.8 percent increase in a Bloomberg News survey of 47 economists. Imports fell 11.3 percent, leaving a trade surplus of $7.71 billion.

China’s economy probably grew 7.4 percent last quarter from a year earlier, according to analysts surveyed by Bloomberg News in March, down from a previous median estimate of 7.6 percent. The statistics bureau will report first-quarter gross domestic product data on April 16.

“We need further signs from fundamentals and monetary policy shifts to confirm the next move upwards” in the stock market, said Hao Hong, the Hong Kong-based chief China equity strategist at Bocom International Holdings Co. “But this looks unlikely.”

Before it's here, it's on the Bloomberg Terminal.