We Need To Talk About China (Again)
We Need To Talk About China (Again)
Premier Qiang hails the 5.2% GDP growth at Davos, but fresh lows in the Chinese stock market tell a different story.
Three stories relating to China have caught our eye this week. All of them are unfortunate tales and potential red flags to new investors sitting on the sidelines (ourselves included) waiting to ‘buy the dip’ in Chinese equities.
So, it’s time to revisit China and mull over the best game plan.
Chinese Funds Are Struggling
Shanghai Banxia Investment Management Center was co-founded by Li Bei. The firm swelled holdings to 10 billion yuan ($1.4bn), with the flagship fund being the Banxia Macro Fund, which was focused on China.
It recorded a 25% max drawdown in 2023, the worst of Bei’s career. In a note that she posted, she realised the bulk of the losses and flagged up the fact that she thought the recovery in the economy would be quicker than it has proven.
Despite this, she said “I have no intention of complaining about the country and blaming the government. I have faith in the future and fortunes of this nation.”
The second fund in the news is Chua Soon Hock’s Asia Genesis Macro Fund. The fund suffered an 18.8% drawdown so far this year and, as a result, is closing down. We can’t express things any better than the note that was sent out, which we have posted below:
Derivatives Could Cause Further Imminent Pain
Performance in the main Chinese stock market indices hasn’t been great over the past few years. The main benchmark is the CSI 300 index. The broader ones that contain more domestic exposure include the CSI 500 and CSI 1000 indices. As an example, the CSI 1000 hit 5,000 points earlier this week, the lowest level since August 2019. It’s down 25% over the past year (shown below):
Now there’s another problem that could impact the market: derivatives. Derivatives is a broad term, ranging from the 0DTE Yolo retail plays to more long-term structured products.
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In this case, it’s snowball products. According to Guotai Junan Futures Co., there are circa $13bn worth of expiries that will either be triggered or are less than 10% away from being triggered shortly. If this happens, more selling is likely.
We’ll probably drop a Demystifying Wall Street on structured products, as the banks love to use jargon on these. Yet, in layman’s terms, a snowball product provides an investor with a coupon (that increases over time, i.e. snowballing) on the condition that the underlying asset stays within a range.
The asset in question is the CSI 1000, and the range is close to being broken on the lowside.
In this case, the product finishes early, with the Put Option being ‘knocked in’. The Options market maker behind the product has to hedge himself for this outcome, which would trigger him to sell the CSI 1000 index. The investor would be cash settled on the loss.
Therefore, we could see another wave of selling depending on how the Options expire.
Let’s now discuss our take on China and some trade ideas.
Is China Actually In Trouble?
According to Chinese data, the economy grew by 5.2% YoY in Q4 2023.
