If the Options Market Is Right, China’s Stock Rescue Is Doomed
2015-08-30 16:00:01.5 GMT
By Kana Nishizawa
(Bloomberg) -- Options traders have never been so
pessimistic on China’s stock market, betting the government’s
renewed effort to prop up share prices is doomed to fail.
The cost of bearish contracts on the China 50 exchange-
traded fund surged to the highest level versus bullish ones
since they started trading in Shanghai six months ago. The so-
called skew also climbed to a record for a similar ETF in the
U.S., even as government buying drove China’s benchmark index to
a 10 percent rally in the final two days of last week.
While policy makers are trying to bolster the market before
President Xi Jinping takes the stage in a World War II victory
parade this week, bears argue that valuations are too high for
the rally to last. Chinese investors have about 5 trillion yuan
($783 billion) of borrowed money riding on stocks, and many of
them are looking for a chance to exit, according to Bank of
America Corp.
“More and more people are not convinced about A shares,”
said Tony Chu, a Hong Kong-based money manager at RS Investment
Management Co., which oversees about $20 billion. “Ultimately,
the government needs to reduce intervention and let more de-
leveraging happen.”
Puts that pay out on a 10 percent drop in the China 50 ETF
cost 7 points more on Friday than calls betting on a 10 percent
gain, according to implied volatility data on one-month
contracts. As recently as Aug. 24, the bullish contracts were
more expensive. For the U.S.-listed Deutsche X-trackers Harvest
CSI 300 China A-Shares ETF, the skew reached a record 38 points
on Aug. 27 and closed the week at 28 points.
Chinese policy actions last week suggest authorities are
intent on putting a floor under share prices. On Tuesday, the
central bank announced its fifth interest-rate cut since
November and reduced the amount of cash banks must set aside for
reserves. State buying on Thursday propelled the Shanghai
Composite to a rally of more than 5 percent in the final hour of
trading, according to people familiar with the matter, an
advance that extended into a 4.8 percent gain on Friday.
‘Unstable Situation’
China’s intervention is part of a broader effort to ensure
nothing detracts from the Sept. 3 parade, an event the
government will use to demonstrate its rising military and
political might. Authorities have also closed thousands of
factories to curb pollution and ordered some vehicles off the
road.
For BofA strategist David Cui, equity valuations and
earnings growth aren’t appealing enough to support the market in
the absence of government buying.
Equities on mainland bourses traded at a median of 53 times
reported earnings last week. That’s the most among the 10
largest markets and more than twice the 19 multiple for the
Standard & Poor’s 500 Index. Analysts have cut their 2015 profit
estimates for Shanghai Composite companies by 8.8 percent this
year, according to data compiled by Bloomberg.
Cui is also worried about the impact of selling by
leveraged investors. Margin loans tracked by Chinese exchanges
have dropped by half from their June peak to about 1.1 trillion
yuan, a figure that doesn’t take into account equity-backed debt
extended by trust companies and other lenders.
“That’s a very unstable situation,” said Cui, who estimates
the Shanghai Composite needs to fall another 35 percent before
shares become attractive. “The government will not support the
market forever.”
The $5 trillion tumble in share prices from mid-June
through last Wednesday has damaged confidence so much that state
buying isn’t enough to lure back investors, according to Kenny
Tang, chief executive officer of Jun Yang Securities Co. in Hong
Kong. It may take further cuts to borrowing costs and reserve
requirements to convince funds to return, he said.
The Deutsche X-trackers Harvest ETF ended last week down
6.2 percent at $32.70 in New York, extending its loss from a
June record to more than 40 percent. The China 50 fund declined
4.7 percent.
“The market sentiment is still quite volatile,” Tang said.
“People are worried that after the rebound there will be some
selling pressure.”
For Related News and Information:
Top emerging-market news: TOP EM
Most-read emerging-market news: MNI EM 1W
Developing economy market moves: EMMV
Emerging-market economic statistics: STAT4
--With assistance from Zhang Shidong in Shanghai.
To contact the reporter on this story:
Kana Nishizawa in Hong Kong at +852-2977-4627 or
knishizawa5@bloomberg.net
To contact the editors responsible for this story:
Sarah McDonald at +61-2-9777-8684 or
smcdonald23@bloomberg.net
Michael Patterson, Nikolaj Gammeltoft
2015-08-30 16:00:01.5 GMT
By Kana Nishizawa
(Bloomberg) -- Options traders have never been so
pessimistic on China’s stock market, betting the government’s
renewed effort to prop up share prices is doomed to fail.
The cost of bearish contracts on the China 50 exchange-
traded fund surged to the highest level versus bullish ones
since they started trading in Shanghai six months ago. The so-
called skew also climbed to a record for a similar ETF in the
U.S., even as government buying drove China’s benchmark index to
a 10 percent rally in the final two days of last week.
While policy makers are trying to bolster the market before
President Xi Jinping takes the stage in a World War II victory
parade this week, bears argue that valuations are too high for
the rally to last. Chinese investors have about 5 trillion yuan
($783 billion) of borrowed money riding on stocks, and many of
them are looking for a chance to exit, according to Bank of
America Corp.
“More and more people are not convinced about A shares,”
said Tony Chu, a Hong Kong-based money manager at RS Investment
Management Co., which oversees about $20 billion. “Ultimately,
the government needs to reduce intervention and let more de-
leveraging happen.”
Puts that pay out on a 10 percent drop in the China 50 ETF
cost 7 points more on Friday than calls betting on a 10 percent
gain, according to implied volatility data on one-month
contracts. As recently as Aug. 24, the bullish contracts were
more expensive. For the U.S.-listed Deutsche X-trackers Harvest
CSI 300 China A-Shares ETF, the skew reached a record 38 points
on Aug. 27 and closed the week at 28 points.
Chinese policy actions last week suggest authorities are
intent on putting a floor under share prices. On Tuesday, the
central bank announced its fifth interest-rate cut since
November and reduced the amount of cash banks must set aside for
reserves. State buying on Thursday propelled the Shanghai
Composite to a rally of more than 5 percent in the final hour of
trading, according to people familiar with the matter, an
advance that extended into a 4.8 percent gain on Friday.
‘Unstable Situation’
China’s intervention is part of a broader effort to ensure
nothing detracts from the Sept. 3 parade, an event the
government will use to demonstrate its rising military and
political might. Authorities have also closed thousands of
factories to curb pollution and ordered some vehicles off the
road.
For BofA strategist David Cui, equity valuations and
earnings growth aren’t appealing enough to support the market in
the absence of government buying.
Equities on mainland bourses traded at a median of 53 times
reported earnings last week. That’s the most among the 10
largest markets and more than twice the 19 multiple for the
Standard & Poor’s 500 Index. Analysts have cut their 2015 profit
estimates for Shanghai Composite companies by 8.8 percent this
year, according to data compiled by Bloomberg.
Cui is also worried about the impact of selling by
leveraged investors. Margin loans tracked by Chinese exchanges
have dropped by half from their June peak to about 1.1 trillion
yuan, a figure that doesn’t take into account equity-backed debt
extended by trust companies and other lenders.
“That’s a very unstable situation,” said Cui, who estimates
the Shanghai Composite needs to fall another 35 percent before
shares become attractive. “The government will not support the
market forever.”
The $5 trillion tumble in share prices from mid-June
through last Wednesday has damaged confidence so much that state
buying isn’t enough to lure back investors, according to Kenny
Tang, chief executive officer of Jun Yang Securities Co. in Hong
Kong. It may take further cuts to borrowing costs and reserve
requirements to convince funds to return, he said.
The Deutsche X-trackers Harvest ETF ended last week down
6.2 percent at $32.70 in New York, extending its loss from a
June record to more than 40 percent. The China 50 fund declined
4.7 percent.
“The market sentiment is still quite volatile,” Tang said.
“People are worried that after the rebound there will be some
selling pressure.”
For Related News and Information:
Top emerging-market news: TOP EM
Most-read emerging-market news: MNI EM 1W
Developing economy market moves: EMMV
Emerging-market economic statistics: STAT4
--With assistance from Zhang Shidong in Shanghai.
To contact the reporter on this story:
Kana Nishizawa in Hong Kong at +852-2977-4627 or
knishizawa5@bloomberg.net
To contact the editors responsible for this story:
Sarah McDonald at +61-2-9777-8684 or
smcdonald23@bloomberg.net
Michael Patterson, Nikolaj Gammeltoft