China Stock Rout Drives Cost To Bet On ETF Drop To Record High
By Belinda Cao and Ye Xie
If U.S. investors thought it was difficult to make money from the boom in China?s stock market, they?re probably finding it even tougher to try to profit from a bust.
At the current cost to borrow shares of the biggest U.S. exchange-traded fund investing in mainland stocks, short sellers need the equivalent of a 40 percent annualized drop just to break even, according to Markit, a London-based research firm. The 28 percent plunge in the Shanghai Composite Index from its bull market high and volatility at the highest level in 18 years have made it more expensive than ever to profit from declines in the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF as investors push bets against the fund to near a record.
?Only a handful of U.S.-traded stocks have such high costs for shorting,? Andrew Laird, a product specialist at Markit said by phone on Monday. ?It has become very difficult to borrow this ETF, and there is virtually no supply left from the traditional custodian banks.?
The ETF sank 9.2 percent to $39.16 in New York on Monday, the biggest drop since July 8, as measure of historical 30-day price swings surged to a record 96 percent. The CBOE China ETF Volatility Index, a gauge of options prices, soared 26 percent to a two-week high of 38.51.
Traders pulled $401 million from the fund in the four weeks through Friday in the longest streak of outflows since it was created in November 2013. Investors withdrew from the ETF amid wide price fluctuations in mainland Chines stocks as the government implemented unprecedented intervention measures to stem a rout that wiped out about $4 trillion in market value.