Monday, November 5, 2012

$FXI/$SSEC Ratio Makes a New High (Nov 5, 2012)

This post turned into a crazy ratio post, so hopefully it makes sense. The iShares FTSE China 25 Index Fund/Shanghai Stock Exchange Composite Index ratio (FXI/SSEC) hit a new six year high of 0.01804 on November 1 after piercing through the 2006 and 2008 highs of 0.0174. The ratio fell significantly after hitting those levels. So are we in for a ratio correction?

Since FXI holds a bunch of Chinese H-shares (mainland Chinese companies that trade on the Hong Kong Stock Exchange and are denominated in Hong Kong dollars), are recent currency moves related to this enormous gap between FXI and the Shanghai Stock Exchange Composite Index? As you can see in the charts below, during the past three months, the Hong Kong Dollar fell hard against the Chinese Yuan (HKD/CNY), and the U.S. Dollar fell against the Hong Kong Dollar (USD/HKD). I also noticed that the Hang Seng China AH Premium Index (spread between A and H-shares) crashed during the past six months. The index is currently at 96; it was at 200 in the beginning of 2008. If FXI/SSEC falls from its 6-year high, it will be interesting to see where FXI, SSEC (Chinese equities overall), and FXI/SPY end up. Crazy trades are all over the place it looks like. This is part II of my previous post "China Technical Update: $FXI, $FXI/$SPY, $FXI/$SSEC (10/15/2012))". FXI is at a major inflection point.

Here are interesting articles to read on the recent move in Chinese stocks.

*China’s Stocks Drop on Data Before Leadership Change, U.S. Polls (Bloomberg News, 11/5/2012)
*Hong Kong Volatility at Year Low Versus VIX: China Overnight (Bloomberg News, 11/4/2012)
*Hang Seng China H-Share Index Enters Bull Market on U.S. (Bloomberg News, 11/2/2012)

The yuan strengthened to a 19-year high on Oct. 29 and monetary authorities in Hong Kong intervened to curb gains in their dollar as flows into Chinese equity funds surged to the most since 2008 in the week to Oct. 24, EPFR Global data showed (from "Hong Kong Volatility at Year Low Versus VIX: China Overnight")

But huge risks still remain.

*Chanos Unmoved by Chinese Banks’ Biggest Rally Since January (Bloomberg News, 11/2/2012)
*The huge and growing subprime debt time-bomb sitting inside China’s banks (Quartz, 10/31/2012)
*China's a 'Roach Motel'; Don't Trust the Numbers: Chanos (CNBC, 9/20/2012)
*The China Syndrome by Vitaliy Katsenelson (Seeking Alpha, 7/23/2012)


1) FXI/SSEC, FXI, SSEC from 2005-2012 (look at the 2006 high and 2008 high vs. today) via Stockcharts.com.




2) FXI/SSEC, FXI, SSEC zoomed in showing comparisons and gaps since 2008.




3) US Dollar/Hong Kong Dollar (3-month chart) via Bloomberg.com (all are direct links).




4) Hong Kong Dollar/Chinese Yuan (3-month chart) via Bloomberg.com.




5) Hang Seng China AH Premium Index via Bloomberg.com.


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