STOCK TALK: China Trades at All-time Highs

Some of the key benchmarks for Chinese equities reached all-time highs on Monday. China’s Shanghai Index rose above 5,150 for the first time ever and set its sixth consecutive record. Meanwhile, Hong Kong’s Hang Seng Index rallied 3% to set fresh all-time highs above 23,500. Consequently, after a big spike in volatility throughout international markets during the months of July and August, it appears that bullish sentiment towards Chinese-related stocks has returned with a vengeance.

Monday’s rally was attributed to hopes that strong inflows from China will boost share prices of mainland-related companies. According to Dow Jones Newswires, several stocks rallied “on expectations they will benefit from a new scheme to allow individual mainland Chinese investors buy shares in Hong Kong.” The speculation led to big gains in many mainland stocks. Jiangxi Copper rallied 26%, Datang International Power rose 15%, and China Mobile () surged more than 30%. 

Monday’s gains helped propel the iShares FTSE/Xinhua China 25 Index Fund () to new all-time highs. The exchange-traded fund [ETF] holds the same twenty-five stocks as the FTSE/Xinhua China 25 Index, which includes both H and Red Chip shares.  Red chip shares are stocks of Hong Kong incorporated companies that trade on the Hong Kong Stock Exchange.  Meanwhile, H shares are companies incorporated in the Peoples Republic of China [PRC] and selected by the Chinese government for listing on the Hong Kong Stock Exchange. FXI shares rose 9.43 to $153.07 on Monday.

The rally in the China 25 Index Fund on Monday adds to an impressive 15.5% advance from last week. As we can see from figure 1, the recent move has erased all of the losses suffered from mid-July to mid-August. In addition, although the global market rout from February to March of this year started with the Shanghai Index in China, stocks in the region are now trading well above the levels seen before the selling started. The February market sell-off appears like a small blip on the radar screen.

Figure 1: iShares FTSE/Xinhua China 25 Index Fund ()

Looking forward, however, there are clearly some risks to holding shares of Chinese companies. Although the region is booming and the economy is growing at a fast pace, there are concerns about a possible asset bubble. The FXI, for example, has more than tripled in value in less than four years. It rose 80.8% last year and is up another 37% year-to-date. Clearly, the pace is unsustainable. In fact, Chinese regulators have already voiced concerns about the recent episode of investor exuberance.

Yet, history has shown that it is difficult to identify bubbles when they develop and even more difficult to anticipate turning points. Consequently, it might be premature to bet against the powerful momentum that has helped drive the benchmarks for Chinese equities to all-time highs. Instead, it might make more sense to look at individual companies and focus some attention on non-directional trading opportunities such as straddles and strangles. The table below provides a list of China stocks that have listed options and trade on the US exchanges.  

Table 1: Trading China
 

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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