Overseas investors are rushing to purchase call options on Chinese concept stocks!
The policy combination punches played by China's financial regulatory authorities have also made foreign investors smell investment opportunities. After multiple positive news were announced, overseas investors increased their bets on the recovery of the Chinese stock market and rushed to buy call options on securities traded in the United States.
Among them, the call option trading volume of iShares China Large Cap ETF (FXI. US) with a scale of 4.3 billion US dollars soared to the highest level since February this year.
So, how long will this round of A-share market continue?
Grab call options
On Tuesday, boosted by multiple positive news, the A-share and Hong Kong stock markets soared collectively. These gains spread to the U.S. stock market, and the exchange traded funds (ETFs) tracking China's large cap stocks and Internet stocks rose more than 8%.
On that day, in the options market, the call options trading volume of iShares China Large Cap ETF (FXI. US), with a scale of $4.3 billion, surged to the highest level since February this year. The premium of a one month contract betting on a 10% increase instead of a 10% decrease has surged to its highest level since 2015, and in early August, the contract was significantly discounted. In the largest transaction of the day, an investor spent $6.75 million to purchase options that could buy 15 million shares at a price of $33 per share before mid November, betting on at least another 12% increase.
Investors also heavily bought call options on the CSI 300 China A-share ETF - Deutsche Bank Jiashi (ASHR. US) and Pinduoduo ADR. The buying trend has also spread to a wider range of emerging market funds. Among them, the trading volume of call options on iShares MSCI Emerging Markets ETF (EEM. US) has surged to more than four times the normal level, with investors mainly buying call options that expire in December and have an exercise price of $50, which is about 11% higher than the current price.
In terms of the Chinese stock market, we expect stimulus news to receive support in the short term, depending on evidence of effective execution, "said Solita Marcelli, Chief Investment Officer of UBS Global Wealth Management Americas." We expect interest rate cuts and capital market support to benefit state-owned enterprises concentrated in high dividend industries, including utilities, telecommunications, energy companies, and financial companies
Morgan Stanley stock strategist Laura Wang said that given the unprecedented nature of the series of stimulus measures released at the State Council Information Office press conference, they will be positive for the market. It is expected that both the onshore A-share market and offshore market will respond positively to this series of measures and may bring tactical rebounds in the short term, even outperforming the overall emerging markets.
Wang Zonghao, head of equity strategy research at UBS China, believes that a series of measures planned by the Chinese government are expected to boost confidence and asset prices, and can build a bottom for market sentiment in the short term. Subsequent documents and financing costs of credit instruments may be the focus of investors' attention in the future.
On Wednesday, the three major A-share indexes all closed up over 1%. Bloomberg pointed out that this indicates that investors welcome the comprehensiveness of the stimulus plan announced on Tuesday, which includes liquidity support for the stock market and a reduction in policy interest rates. We believe that these coordinated policy announcements can pave the way for further policy support and increase the likelihood of China's economic upswing cycle in 2025, "wrote Zhu Chaoping, global market strategist at JPMorgan Asset Management, in a report." Combining the increase in private enterprise profit margins and improvement in corporate fundamentals, we do see value opportunities in Chinese stocks
Boosting market confidence
On September 24th, Pan Gongsheng, Governor of the People's Bank of China, Li Yunze, Director of the State Administration for Financial Regulation, and Wu Qing, Chairman of the China Securities Regulatory Commission, introduced the relevant situation of financial support for high-quality economic development at the press conference of the State Council Information Office, and announced the introduction of a series of incremental policies, including reducing the reserve requirement ratio and policy interest rate, and driving down the market benchmark interest rate; Reduce the interest rate of existing housing loans and unify the minimum down payment ratio for housing loans; Create new monetary policy tools to support the stable development of the stock market.
CITIC Securities pointed out that in terms of monetary policy, the central bank announced a 20 basis point interest rate cut for reverse repurchase, which exceeded market expectations in both timing and magnitude. The 50 basis point reserve requirement ratio cut is basically in line with expectations, and the policy combination fully reflects the central bank's supportive monetary policy stance and orientation. In terms of real estate policy, the central bank expects the LPR to decline by 20-25 basis points and proposes to guide the average decline of existing mortgage interest rates by 50 basis points, which is conducive to reducing the burden of home ownership and repayment for residents. The central bank will also adjust the national minimum down payment ratio for second homes from 25% to 15%, and increase the support ratio for refinancing of affordable housing from 60% to 100%, or support the sale of real estate. In terms of capital market policies, Wu Qing clearly stated at the press conference that the China Securities Regulatory Commission will release three key policies: medium and long-term capital inflows, measures to promote mergers and acquisitions, and guidelines for market value management of listed companies. The central bank will provide liquidity support for non bank institutions, listed companies, and major shareholders to participate in the stock market.
The latest policy supports the development of the equity market with innovative monetary policies, creates convenient exchanges for securities, funds, and insurance companies, and creates special refinancing loans for stock repurchases to increase holdings, which helps boost market confidence and directly improve market liquidity expectations. CITIC Securities stated that the "quasi flat" funds from long-term investment are expected to increase in inflow and expand investment scope, and various medium - and long-term funds investing in the stock market are expected to accelerate, enhancing the market's short-term risk appetite; In addition, optimize the registration of equity fund products and vigorously promote the innovation of index based products. The policy signal is more clear, and the expectation of loose monetary policy has been implemented. It is expected that other incremental policies will also be implemented in the future, reducing the reserve requirement ratio and policy interest rate, and driving down the market benchmark interest rate.
Huafu Securities also stated that this combination of financial policies is of great significance in supporting the real economy and boosting confidence in the capital market, mainly reflected in three aspects: first, policies such as reserve requirement ratio cuts, interest rate reductions for existing housing loans, and unified minimum down payment ratios for housing loans, which have a positive supporting effect on stabilizing the real estate market and supporting high-quality development of the real economy. The second is to create new monetary policy tools to support the stock market, inject liquidity into the market, and issue policy opinions on medium and long-term capital inflows, which will establish a long-term mechanism for patient capital inflows and create a continuous cycle of medium and long-term capital inflows. The third is the continuous promotion of institutional construction in the capital market. The relevant policies issued by the China Securities Regulatory Commission, such as measures to promote mergers and acquisitions, market value management guidelines for listed companies, etc., will continuously improve the details of relevant systems and effectively enhance the inherent stability of the capital market. Huafu Securities pointed out that this press conference has launched numerous policy measures to support the real economy, which is a "real gold and silver" support for the real economy and capital markets. Many policy measures have exceeded market expectations and constitute significant support for the economy and market. A-shares are expected to enter a period of comprehensive counterattack.
China Merchants Securities pointed out that after the policy exceeded expectations, the February and September lows of the main A-share indexes were judged to constitute the "double bottom" of this market adjustment, and the medium-term bottom was basically established. With the successive release of future policy documents, it will provide continuous stimulation to the market. From experience, the market's understanding of policies tends to be gradual, meaning that in the early stages of policy implementation, many policy details may be overlooked due to emotional factors. These policy details are often gradually discovered by the market and evolve into investment opportunities. Therefore, with the release of policy documents, more policy details are being explored, the importance is being recognized by the market, and market risk appetite will continue to improve.
China International Capital Corporation (CICC) believes that the emergence of positive policy signals is expected to boost investor sentiment. After the sharp rise in the stock market on September 24th, there may be short-term setbacks, but it is expected that the rebound will continue. The market trend stabilization still needs to pay attention to changes in the fundamental expectations of listed companies in the future. In terms of configuration, non bank and real estate chains may perform well in the short term, and focus on small and medium-sized market values and growth styles in the medium term. High dividends may still show differentiation.