Easing Deflation Could Give China Bulls Some Hope

Bearish China traders have had the upper hand for most of the year. Still, easing deflation could give bulls a glimmer of hope.

The month of August saw consumer prices rise 0.1 percent higher year on year. This falls short of a Reuters poll of analysts that were expecting a 0.2 percent increase. However, prices were still able to break out of negative territory; they were at -0.3 percent just a month ago.

Per a Financial Times report, the China’s National Bureau of Statistics recently said that “the consumer prices index had on average increased 0.5 per cent in the first eight months of the year compared with the same period in 2022.”

“There is a bit of improvement in the inflation profile. In the meantime, the PPI deflation appears to be narrowing, pointing to a slow and moderate restoring process,” said Zhou Hao, chief economist at Guotai Junan International.

Reuters Graphics
Reuters Graphics

China’s economy pulled back since the start of the year. Lingering issues from its real estate development crisis the last few years continue to hamper growth. In an effort to stimulate growth, China’s government has been taking measures to revive the real estate sector.

“The country’s property market, which accounts for about a quarter of economic activity, remains on life support with large private sector developers suffering a liquidity crunch and buyers reluctant to venture into the market,” the FT report added further. It noted that in order to address the problem, policymakers have “cut mortgage rates and relaxed stringent requirements for loans but analysts have described the measures as ‘piecemeal’ and have called for more fiscal stimulus to boost demand.”

Overall, the bearish tone is manifesting itself in the MSCI China index, which is down 7% for the year. It remains to be seen whether government stimulus measures will be effective enough to bring the economy back to life. Still, in the meantime, the volatility should give short-term traders enough to work with.^MSCN Chart

^MSCN data by YCharts

Two Options to Play Volatility in China

As mentioned, if China is able to pull out of its economic doldrums, then traders can play the bullish card with the Direxion Daily FTSE China Bull 3X ETF (YINN). YINN tracks the FTSE China 50 Index. That index consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange.

However, if the bearish tone persists, then traders can use the Daily FTSE China Bear 3X Shares (YANG). The opposite of YINN, YANG seeks daily investment results equal to 300% of the inverse (or opposite) of the daily performance of the FTSE China 50 Index.

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