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Trading China Stocks and the Fallout from the Evergrande Crisis

October 06, 2021
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China Stocks: China H-Shares and China A-Shares Comparison Performance Percentage Change Chart Following Evergrande News.

Photo by Pixabay from Pexels

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

Chinese property developer Evergrande Group has been topping headlines recently, and for good reason. In this latest Xchange installment, we will discuss impacts of the Evergrande crisis and China crackdowns, and China stock trading opportunity given the recent volatility.  

Evergrande Crisis

The largest real estate developer in China is falling off a financial cliff under the weight of $300 billion in outstanding debt, which totals nearly 3% of China’s national GDP, and makes them the most indebted property developer in the world.

China Regulatory Category

In addition to the Evergrande crisis, the regulatory crackdown (largely aimed at the Tech sector) in China continues to weigh on global markets. The uncertainty may result in elevated volatility, especially in Chinese equities, but it is also set to create short-term trading opportunities in Chinese H-Shares and Chinese A-Shares, and traders should be mindful of the backdrop.

Key Questions on China Stock Trading

  • Real Estate and Property accounts for over 16% of the country’s GDP.  How will the market react if we see signs of significant risk aversion and deleveraging across these sectors?
  • With Chinese local markets trading close to 2020 lows, do they continue to make lower lows or find a bottom?
  • Do the challenges in China continue to spillover to global markets or they begin a more isolated trading opportunity?

China Stock Trading Opportunities May Present Themselves

  • The FTSE China 50 Index (H-Shares) offers significant exposure to the Internet and E-commerce industries, while the CSI 300 Index (A-Shares) is a bit more concentrated in the Banks and Financial Services industries. Traders interested in gaining exposure to these sectors should look at Direxion Daily CSI China Internet Index Bull 2X Shares ETF ($CWEB).
  • Most recently, Evergrande missed its second offshore debt obligation in a week. Evergrande has been silent on these missed payments thus far, but comments and clues from Evergrande regarding their offshore obligations may present traders with trading opportunities.
  • Traders may be able to use updates on the restructuring plans for Evergrande as trading opportunities. Most recently, Evergrande announced that it would sell a $1.5B stake in Shengjing Bank Co. to a state-owned asset management company.
  • Beijing seems unlikely to intervene to resolve this situation in the form of a bailout, but any headlines related to some form of intervention may be supportive for stocks in the short-term.

China Stock Trading Opportunities with Direxion ETFs China Bull/Bear

Only time will tell if the Evergrande crisis trickles into a more global one, and short-term volatility may be the word of the day, but with the Direxion Daily Leveraged ETFs — whether a bull or bear ETFs — traders can trade through the volatility, as the saga unfolds.

Our Daily FTSE China Bull 3X Shares (YINN) and Daily FTSE China Bear 3X Shares (YANG) seeks daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the FTSE China 50 Index.

The Daily CSI 300 China A Share Bull 2X Shares (CHAU) and the Daily CSI 300 China A Share Bear 1X Shares (CHAD) seeks daily investment results, before fees and expenses, of 200%, or 100% of the inverse of the performance of the CSI 300 Index. The target index is more concentrated in Chinese banks, real estate, and building products.

Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments.

Definitions

China H – Shares: represent the shares of publicly-traded incorporated Chinese companies listed on the Hong Kong Stock Exchange. H-shares are issued in China under Chinese law and are subject to the Hong Kong Stock Exchange's listing requirements.

China A – Shares: the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, China A-shares were only available for purchase by mainland citizens due to China's restrictions on foreign investment.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

Risks associated with investments in Chinese companies include, among others, (i) the small size of the market for Chinese securities and low trading volume, resulting in a lack of liquidity and in price volatility; (ii) currency devaluations and other currency exchange rate fluctuations or blockages;(iii) the nature and extent of intervention by the PRC government in the Chinese securities markets, whether such intervention will continue and the impact of such intervention or its discontinuation; (iv) the risk of nationalization or expropriation of assets; (v) the risk that the PRC government may decide not to continue to support economic reform programs; (vi) limitation on the use of brokers; (vii) higher rates of inflation;(viii) greater political, economic and social uncertainty; (ix) market volatility caused by potential regional or territorial conflicts or natural disasters and; (x) the risk of increased trade tariffs, embargoes and other trade limitations. These factors can directly affect A-shares, and may indirectly affect investments that derive their value from Ashares. Any reduction or elimination of access to A-shares will have a material adverse effect on the ability of the fund to achieve its investments objective.

Risks of the Fund include Effects of Compounding and Market Volatility Risk, Derivatives Risk, Leverage Risk, Market Risk, Market Disruption Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk, and Emerging Markets Risk. Investing in, and/or having exposure to, emerging markets instruments involves greater risks than investing in issuers located or operating in more developed markets. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor for Direxion Shares: Foreside Fund Services, LLC.