China Bears Backpedal From A-Share ETF on Stimulus, Fed Outlook

  • Short interest has fallen to 9.2%, down from 25% in June
  • ETF has rallied for five days as mainland markets are closed

Traders cut bearish wagers on an exchange-traded fund tracking mainland Chinese stocks to a four-month low amid expectations the latest policy effort to stimulate the country’s economy and the postponement of a U.S. rate increase will help stabilize the A-share market.

Short interest on the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF fell to 9.2 percent as a percentage of shares outstanding on Friday, the lowest since June 9 and down from a record 25 percent in August, according to data compiled by Markit. The fund has rallied for five days as policy makers increased targeted stimulus after reductions in interest-rate and reserve ratio requirement failed to reverse an economic slowdown.

While mainland markets are closed until Oct. 8 for holidays, the ETF has advanced with Chinese stocks in Hong Kong as the government took steps to boost specific sectors of the economy including a reduction of the minimum home down payment for first-time buyers in cities without purchase restrictions. Fed fund futures show that traders increased the odds of U.S. policy makers waiting until at least March before increasing the near-zero interest rates that have bolstered demand for riskier assets.

“The sentiment has definitely calmed down on China since the summer,” Gabriel Wallach, founder of North Grove Capital LLC in Boston which invests in Chinese stocks, said by phone on Monday. “Recent data and measures by the government, including reducing down payments on first home purchases, reduced tax on autos, easing interest rates since the beginning of the year -- all of this has been slightly positive.”

China has struggled to halt a $5 trillion stock rout as expansion in the world’s second-largest economy slows, rattling investors who had pushed the Shanghai Composite Index to the highest since 2008 in June. The government has tried to bolster the weakest expansion in gross domestic product in 25 years with five interest-rate cuts since November and a currency devaluation in August. Growth will slow to 6.8 percent this year, below the government’s goal of 7 percent, according to the median of economist estimates compiled by Bloomberg. 

The Deutsche A-share ETF rose 1.4 percent to $33.85 on Monday in New York, capping a 6.6 percent advance in the past five days. The Hang Seng China Enterprises Index had gained 2 percent to 9,883.71, its highest close since Sept. 21, earlier in Hong Kong. The ETF, which has $423 million in assets, has lost 39 percent since a record in June.

A Bloomberg gauge of Chinese stocks trading in New York rose 1.7 percent to the highest since Aug. 19, extending a rally last week that was biggest five-day advance since 2011. Melco Crown Entertainment Ltd. soared 9.1 percent to $16.92. Macau casino operators have rallied amid signs that Chinese authorities have stopped tightening restrictions on visits to the gambling hub and figures showed a jump in Chinese visitors to the city. Alibaba Group Holding Ltd. added 1.2 percent to $63.93.

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