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China ETF Hedging Costs at Record Low on Stimulus Wagers

Jun 16, 2014 12:38 PM ET

The cost of hedging against losses in the largest Chinese exchange-traded fund in the U.S. has fallen to a record low on optimism that government stimulus will help sustain growth in the world’s second-biggest economy.

The iShares China ETF rallied for five weeks, gaining 10 percent in the longest streak in a year, while options pricing on the fund is indicating investors are less concerned about future losses. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. rose 2 percent last week for the biggest advance since February.

Chinese stocks are back in favor as growth in industrial output and retail sales accelerated in May while new bank loans exceeded analyst estimates. Policy makers have taken measures such as lowering reserve requirements for some banks, providing tax breaks and accelerating public spending to shore up an economy that expanded at the slowest pace in six quarters for the January-March period.

“The targeted easing over the past two months has kept a floor under growth and assuaged investors’ concerns about a hard landing,” Michelle Gibley, director of international research at San Francisco-based Charles Schwab Corp., which has about $2.35 trillion in client assets, said by e-mail on June 13. “Chinese stocks are pricing in a lot of bad news and we believe the risk/reward is favorable for owning Chinese stocks over the next 6-12 months.”