It Might Be Time This China ETF Again

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF ASHR, the largest exchange traded fund trading in New York that tracks equities trading on mainland China, posted a modest November gain. However, ASHR is lower by more than three percent over the past week and the actions of some traders indicate they are preparing more downside in A-shares.

Struggles for ETFs such as ASHR and the Market Vectors ChinaAMC A-Share ETF PEK would bring good tidings for the Direxion Daily CSI 300 China A Share Bear 1X Shares CHAD. CHAD, which is designed to deliver the daily inverse performance of the CSI 300 Index on a percentage-for-percentage basis, has climbed nearly 12 percent since coming to market in mid-June.

Headlines say CHAD is primed for more upside. A-shares are considered expensive in the eyes of some market observers, China's central bank stubbornly refused to lower the reserve requirement ratio over the weekend and news that the nation's pension fund is buying stocks was clearly not met with any enthusiasm. 

Short interest in ASHR “more than doubled in two weeks to a record 28 percent of shares outstanding on Nov. 27, according to data compiled by Markit and Bloomberg. When such wagers last climbed this fast in June, short sellers proved prescient as China’s equity-market boom turned into a $5 trillion rout,” according to Bloomberg. 

Prior bouts of outflows from traditional A-shares ETFs coupled with inflows to CHAD have been harbingers of upside to come for the lone inverse A-shares fund. In November, ASHR bled nearly $146 million though inflows to CHAD were modest at just under $5 million. ASHR's rival, the aforementioned PEK, added almost $12 million in new assets last month. Traders have consistently backed CHAD this year, pouring over $129 million into the fund, making it one of the most successful new ETFs to come to market in 2015.

As A-shares have tumbled in recent months, investors have endured situations such as days where half the stocks trading on the mainland where halted by Chinese regulators and ineffective market interventions, a tool Beijing has since told market participants that they should not become too dependent on.

"While Chinese equity valuations have fallen from their June highs, the Shanghai Composite index still trades at 13 times estimated profits for the next 12 months, a 30 percent premium versus its five-year average, according to data compiled by Bloomberg,” reports the news agency.

CHAD's leveraged, bullish counterpart, the Direxion Daily CSI 300 China A Share Bull 2X Shares CHAU, has seen its volume dwindle in recent days, but the ETF averaged positive daily creation throughout much of November, according to Direxion data.