How Traders Trapped by China Holidays Are Hedging the Virus Risk

(Bloomberg) -- This is a nerve-wracking week for global investors with exposure to Chinese assets: the country’s markets are closed for the Lunar New Year, leaving them unable to hedge risks arising from the coronavirus epidemic.

Still, there are a range of stock and bond proxies listed in the rest of Asia, Europe and the U.S. that offer a way to trade -- even when the country is closed:

U.S. Listings

As many as 79 Chinese companies have their ordinary shares or depositary receipts in the New York Stock Exchange, according to an exchange publication. That includes Alibaba Group Holding (consumer-discretionary), PetroChina Co. (energy) and Yum China Holdings (restaurant chain).

Nasdaq-listed stocks include JD.com, Baidu Inc. and NetEase Inc.

Most of these companies reflect the re-focusing of China from an export-driven economy to a domestic-consumer story. The inevitable impact of the virus on economic activity may hurt these companies, but there’s also a counter argument.

As China locks down tens of millions of people, discouraging them from physical shopping and traveling, some may turn more toward online transactions, boosting the fortunes of these firms.

The S&P/BNY Mellon China ADR Index, which tracks depositary receipts on both exchanges, fell 6% last week, the biggest plunge since September.

Movers overnight:

• Alibaba drops most since Oct. 18, erases this month’s gains
• PetroChina ADR takes three-day decline to 5.5%
• Yum China drops as much as 8.2% before paring losses
• Baidu drops a fifth day, the longest streak since Nov. 20
• JD.com fell the most since Sept. 27
• NetEase extended its retreat to a sixth day

European ETFs

A clutch of ETF listings in Europe offers a way to wager on the issue.

While China has an agreement with the London Stock Exchange to help companies make initial public offerings in the U.K. capital, the plan is still in an early stage.

For now, funds do the heavy lifting. The iShares MSCI China A UCITS ETF, which tracks China A shares, has assets close to $800 million and has given investors a 25% return in the past year. Its top holdings include the beverage company, Kweichow Moutai Co., and Ping An Insurance Group.

Paris and Frankfurt offer products too.

The Lyxor China Enterprise HSCEI UCITS ETF, traded in the French capital, has a market capitalization that’s 23% below its total assets of 627.6 million euros ($692 million). That may tempt investors who believe China can spring back from the crisis.

The Xtrackers MSCI China UCITS ETF in Frankfurt gives traders greater exposure to technology and consumer companies in the world’s second-largest economy. With Alibaba and Tencent Holdings among its top picks, the fund offers a way of trading U.S.-listed Chinese companies before New York markets open.

Movers overnight:

• iShares MSCI China A UCITS ETF (London) dropped 6.4%, most since May 7
• Lyxor China Enterprise HSCEI UCITS ETF declined 5%, biggest drop since February 2016
• Xtrackers MSCI China UCITS ETF drops to a six-week low

Currencies

The offshore yuan trades round the clock. On Monday it closed down 0.8% at 6.9866, compared with the onshore currency’s close on Thursday at 6.9368.

In one of the few Asian markets open on Monday, the Thai baht weakened for a third day and extended its decline on Tuesday.

Other China proxies in the currency market include the Australian dollar, which weakened more than 1% versus the greenback on Monday. And commodity-related foreign-exchange markets, such as the Russian ruble, South African rand and Chilean peso, slumped as energy and metals prices tumbled.

Derivatives

Singapore offers an opportunity to trade Chinese assets in similar hours to Shanghai or Shenzhen.

The city-state offers offshore futures of China’s mainland listings (known as A shares) based on the underlying FTSE China A50 Index. The current near-month contract trades at a discount to the underlying index that’s six standard deviations off its mean. Most of the gap is due to the Chinese holidays and could close when the markets reopen.

The Cboe China ETF Volatility Index has gained 65% in the past five sessions -- though the U.S.-oriented Cboe Volatility Index, or VIX, is up 92% in that time. The VXFXI was starting at a higher base, however, closing on Jan. 17 at 16.47 compared with 12.10 for the VIX.

Movers overnight:

• FTSE China A50 February contract plummets to a discount of 666 points to its underlying index

U.S. ETFs

As many as 54 American ETFs provide a vehicle for investors to buy Chinese stocks, bonds and even commercial paper. The top five of these funds have assets of almost $16 billion. That may seem negligible compared with China’s equity-market capitalization of $7.5 trillion, but given the market has only opened up to global capital in recent years, it represents the largest opportunity for investors.

U.S. ETFs investing in Chinese assets received $360 million of inflows last week, a 76% drop over the previous week, according to data compiled by Bloomberg. But that was the biggest inflow among emerging-market nations, a pointer to China’s dominance in the asset class even in these stressed times.

Movers overnight:

• iShares MSCI China ETF falls below its 50-day and 100-day moving averages
• iShares China Large-Cap ETF has the biggest three-day loss since August

--With assistance from Joanna Ossinger and Tomoko Yamazaki.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Carolina Wilson

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