The iShares China Large-Cap ETF (NYSEArca: FXI), the largest U.S.-listed exchange traded fund tracking Chinese stocks, is down more than 14.7% year-to-date and it looks like some traders are betting on more declines for some of the stocks held by FXI and rival China ETFs.
On Tuesday, hinese equities rebounded after data revealed the country’s banks issued a record amount of loans in January, Bloomberg reports. Moreover, supporting the flagging economy, Beijing is expected to release a package of measures to ensure growth hits its targets this year. Due to the recent economic weakness, investors have been selling Chinese equities, which has fallen the most among global markets after Greece’s this year.
“Short interests in Hong Kong stocks have surged this year while overseas investors cashed out on ETFs, data provided by Markit shows,” reports Shuli Rhen for Barron’s. “Hong Kong’s benchmark Hang Seng Index has fallen by about a third from its peak in 2015 but cheap valuation has not deterred shorts. This year, short interest in the Hang Seng Index’s stocks have increased 23% with shares outstanding on loan to just above 1%.”
Chinese company stocks that trade in Hong Kong are not a perfect way of expressing views on China as there is a limited pipeline between Hong Kong and Shanghai, which restricts efficient arbitrage between the two markets. The the two markets, though, are beginning to open up through the new stock connect program.
Consequently, despite the horrible start to the new year, China A-shares are still trading at a 40% premium to their Hong Kong-listed H-shares counterparts – the Hang Seng China Enterprise Index shows one of the cheapest valuations in the world at six times expected earnings.
“While real estate remains the most shorted by value, shorts are looking at technology companies too. Tencent Holdings (700.Hong Kong) saw a sharp rise in short positions to $1.5 billion recently, or 0.9% shares outstanding on loan,” adds Barron’s. “Meanwhile, overseas investors continue to cash out. Year-to-date, aggregate outflows across foreign listed ETFs exposed to Hong Kong have seen $460m of outflows.”
Over 260 U.S.-listed ETFs feature some exposure to China with marquee names including the iShares China Large-Cap ETF, which is the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange. H-shares, or the Chinese stocks trading in Hong Kong are some of the least expensive stocks in the world and FXI has a price-to-earnings ratio below that of the MSCI Emerging Markets Index. [Cheap EM ETFs]
iShares China Large-Cap ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.