China Stock Hedges at 12-Year Low Suggest Traders Bet on Calm

(Bloomberg) -- When it comes to hedging of Chinese stocks traded in Hong Kong, options traders appear to be in holiday mood.

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The number of outstanding contracts on the benchmark Hang Seng China Enterprises Index has slumped to its lowest level since 2012 following last week’s expiration, data compiled by Bloomberg show. At the same time, the cost of protecting against swings in the next three months is near a three-year low relative to six-month options.

Traders are seeing little need to hedge as the index has lost more than 8% from a high in May. While the heavyweights of the Chinese Communist Party are meeting this month to discuss policy, the expectation is that the so-called Third Plenum will reinforce President Xi Jinping’s long-term goals rather than unveil new reforms that could shake the market.

There is no significant mispricing in July options, according to Jason Lui, the head of equity and derivatives strategy for Asia Pacific at BNP Paribas SA.

“People are like, ‘OK, I’d much rather wait for a trend to establish’ before they choose to express their view in the options market,” he said in an interview at the end of June.

After four straight years of losses, Chinese stocks in Hong Kong have regained some ground in 2024, with the Hang Seng China Enterprises Index up 11%. Yet concerns over a weak economy have halted a rally that took the gauge to a one-year high in May.

“Investors have seemed to temporarily shift focus from domestic stimulus to the global liquidity cycle and the global geopolitical cycle before the second-quarter earnings season starts in mid-July,” JPMorgan Chase & Co. analysts wrote in a note.

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