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Bloomberg

Options traders keep finding new reasons to get bullish on Chinese stocks.
First, an acceleration in government spending sent the biggest Chinese exchange-traded fund in the United States to a three-year high in September.
After that rally faded, bulls turned their attention to the Shanghai-Hong Kong Stock Connect scheme.
When inflows as the cross-border trading link debuted last week proved disappointing, optimists were redeemed by China's surprise interest rate cut.
The result is that options traders are now the most bullish on record, sending the cost of three-month puts on the iShares China Large-Cap ETF to a record low relative to calls on November 21.
JP Morgan Chase, Barclays and UBS say the People's Bank of China's first interest rate cut since 2012 will be followed by further reductions as policymakers act to shore up growth in the world's second-largest economy.
"There's a lot of interest in China globally," said Nader Naeimi, who helps manage about US$125 billion as the head of dynamic asset allocation at AMP Capital Investors in Sydney. "I expect to see more and more demand for Chinese shares. The momentum has turned around."
The Shanghai Composite Index is set to post a seventh straight monthly gain, the longest winning streak since 2009.
Deutsche Bank's X-trackers Harvest CSI 300 China A-Shares ETF jumped 5.1 per cent in New York last Friday to the highest level since its US debut a year earlier. The iShares China Large-Cap ETF surged the most in nine months.
Puts protecting against a 10 per cent slide in the iShares China Large-Cap ETF cost 0.3 point more than calls betting on a 10 per cent rally on November 21, and the gap known as skew was 1.4 points on Tuesday. The most-owned option on the gauge was a US$55 call expiring in January. That strike price was 37 per cent above Tuesday's close.
ETFs are a better way for investors to bet on Chinese stocks than the Hong Kong-Shanghai trading scheme that debuted last week, according to Pauline Dan, the head of greater China equities at Pictet Asset Management in Hong Kong.
The skew on the iShares fund has remained at least 40 per cent below this year's average even as flows through the link stagnated.
China is counting on the bourse link to help open up its capital account, boost local equity valuations and increase global use of the yuan. Stocks fell in both cities as buyers left 76 per cent of quotas unfilled in the first five days of the trading connect.
"The link is definitely positive for China as this shows the will of the authorities to further open up the market," said Marco Montanari, the head of passive asset management at Deutsche Bank in Hong Kong. "International investors aren't that familiar with the Chinese A-share market so they invest in ETFs to gain macro exposure to China."
"Broad loosening in China will have a huge stimulatory effect to an economy that is already structurally in a far better position than at the beginning of all previous loosening cycles," said Douglas Morton, the head of Asia research at Aviate Global. "The rally to come should be large."
The main beneficiaries were business borrowers, Bloomberg North Asia economist Tom Orlik wrote in a note.
State-owned enterprises, real estate developers and local government investment platforms would be able to tap new loans at lower rates to refinance existing borrowing and fund new projects, he wrote.
While the rate cut could fuel a short-term rally in Chinese equities, it is too early to conclude that the Chinese economy has bottomed, according to Dan. "The feel-good factor will be there for the next three months," she said. "We probably have not seen the worst in the Chinese economy."
Valuations on Chinese equities are among the lowest in major markets, with shares on the Shanghai Composite Index trading yesterday at 10.3 times estimated earnings and the H-share index at 7.4, data showed. That compares with 17.2 times for the Standard & Poor's 500 Index and 16 for the MSCI All-Country World Index.
"The market's hand is off the risk-off button and now leaning firmly on the risk-on button,'' said Sam Le Cornu, a senior portfolio manager at Macquarie Funds Management in Hong Kong. "We're always going to get volatile monthly data. We don't think we're going to get a hard landing as there would be a lot of stimulus.
"The stock connect is a landmark development. People need to be patient and have a long-term view to see its full effect to be realised."


China equity bulls find new reasons to get more bullish

China-focused exchange-traded funds and tracker funds are enjoying a strong rally on the New York stock market. Photo: AFP

Business

Money

Markets & Investing

Options traders are finding reasons to be even more optimistic about mainland shares, with optimists revelling in the recent interest rate cut


Options traders keep finding new reasons to get bullish on Chinese stocks. First, an acceleration in government spending sent the biggest Chinese exchange-traded fund in the United States to a three-year high in September.


China equity bulls find new reasons to get more bullish

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Options traders are finding reasons to be even more optimistic about mainland shares, with optimists revelling in the recent interest rate cut

Options traders are finding reasons to be even more optimistic about mainland shares, with optimists revelling in the recent interest rate cut