Even conservative US investors are placing record bets via options in Chinese equities in the event that a path emerges out of the country’s property problem and zero-Covid melancholy. This is being done in the event that a path emerges out of the country’s property crisis and zero-Covid malaise.
The amount of money spent on purchasing stocks listed in Shanghai and Shenzhen through the Hong Kong Stock Connect program has reached more than Rmb27 billion ($3.8 billion) this week, according to calculations made by the Financial Times based on data from the exchanges.
Foreign investors have totally reversed the record overseas selling that was spurred by President Xi Jinping’s consolidation of power at the Chinese Communist party congress one month ago. The scheme is a primary channel for foreign investors buying mainland equities.
This enthusiasm has resulted in net inflows to China’s market so far this year, and it follows promising signals from Beijing, which over the weekend disclosed fresh help for the country’s indebted property developers.
The revelation late last week of a list of methods for optimizing Covid prevention and management has also stoked optimism that the end may be in sight for Xi’s economically destructive zero-Covid policy.
A Shanghai-based director of a Chinese brokerage issued a warning that the majority of inflows so far appeared to have come from “more speculative” investors such as hedge funds rather than long-only asset managers, the participation of which would signal more meaningful enthusiasm for Chinese securities. This warning was issued by a director of the brokerage’s office in Shanghai.
The director stated that “[Long-only investors] appreciate what they’re seeing, but they need to see more clarity on these policies… to really turn it around.”
Investors in the United States have been buying call options in order to protect themselves against the possibility of losing out if a reopening does result in a sustained advance.
In recent weeks, the volume of outstanding call contracts for the most liquid US-listed options monitoring China’s stock market has broken records. These options are tracking the CSI 300 Index.
Investors are given the right but not the duty to buy assets at a predetermined price at a later date when they purchase calls. These contracts are based on BlackRock’s China Large-Cap ETF, which is a passive fund that tracks the FTSE China 50 index. This fund is the most liquid of these contracts. The number of calls that have not yet been returned has increased by 35% this month and has more than doubled since the beginning of September.
According to Amy Wu Silverman, an equity derivatives strategist at RBC Capital Markets, many investors are “intentionally underinvested” in Asia right now because it’s very hard to analyze the geopolitical and political risks… but a tail risk is that Xi Jinping can turn around and say, ‘Covid is over.'” It would appear that this [the purchasing of options] is one of the more appealing strategies to maintain exposure.
Initially, foreign investors did not participate in a nascent rebound for the benchmark CSI 300 index, which has already increased by almost 9 percent since reaching its lowest point in late October.
Pruksa Iamthongthong, senior investment director of Asia Dragon Trust at Abrdn, stated that “there’s some interest coming back, despite the fact that you can’t call it a sustained rally yet, and that a lot will depend on the execution of the policies that have been presented.”
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