Hedging a gauge of Chinese shares is the priciest in at least a decade relative to US equities. Credit-default swaps insuring China’s five-year government bonds are the highest in two years. Options skew in the currency market is at levels last seen in late 2020, reflecting bets the yuan will weaken against the dollar. Outflows from the nation’s sovereign debt show even assets perceived as havens are turning risky.
The loss of confidence by global investors comes at a crucial time for China’s ruling elite. In the autumn, the Communist Party will announce a twice-a-decade leadership reshuffle. Xi is widely expected to extend his rule as party chief and install allies in key positions, while Premier Li Keqiang will step down from his role.
The bull case built on stimulus expectations and cheap valuations is being eviscerated. China’s central bank unexpectedly refrained from cutting interest rates on Tuesday, showing its restrained approach to monetary policy amid increasing inflation risks. Wall Street was overwhelmingly bullish on Chinese stocks when the MSCI China Index traded at 12.2 times projected earnings because stocks were too cheap to ignore, but it’s now valued at only 8.5 times earnings.
The price of hedging Chinese stocks is also reaching extremes. Implied volatility of the $5.1 billion iShares MSCI China exchange-traded fund — the largest US-listed ETF tracking Chinese stocks — is at a record relative to the US stocks ETF , according to 30-day data. Short selling comprised almost 70% of Trip.com Group Ltd.’s total turnover in Hong Kong on Monday, and almost 40% for Alibaba Group Holding Ltd. earlier this month.