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China Stock Rout Seen Getting Uglier as Derivative Trigger Looms

  • Banks need to sell futures used to hedge products, BofA says
  • Hang Seng China Enterprises Index sinks toward key 8,000 level
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China Chaos: What Would Stabilize the Markets?

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If Bank of America Corp. is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling.

That’s because the benchmark Hang Seng China Enterprises Index is trading at a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it breached on a closing basis Thursday for the first time since 2009.