China first popped on my trading radar when their stocks began rising rapidly in 2007. A quick glance at the 10-year chart on the iShares China Large-Cap ETF (FXI) shows these extreme peaks and valleys pretty clearly. FXI hit a 10-year high in October 2007 when it notched levels above $72 before plummeting all the way down to $24 in 2008. Chinese stocks caught fire again in 2014 rising just north of $50 before flaming out to great international fanfare in 2015-16 to about $30 in 2016.
With FXI currently sitting between the extreme points visited during the last two Chinese stock bubbles (around $33), a natural question is of course “what’s next?”
Reading forecasts on China’s economic future, one can find a range of opinions that suggest China is either “screwed” or “doing just fine.” And maybe just like FXI, the true answer lies somewhere in the middle.
While it’s true that China is facing economic headwinds, the country possesses a rather enviable “Smaug-sized” horde of foreign-exchange reserves.
Weighing in at roughly $3.2 trillion, this stash can be used to defend the value of the Renminbi (RMB or Yuan) or as fuel for another stimulus package, amongst other things.
The country spent about $500 billion of their foreign-exchange reserves supporting the value of their currency. However, in early 2016, the increasing rate at which China was using their savings to protect the RMB began to set off alarm bells. In January 2016, the People’s Republic used an eye-popping sum of $100 billion defending the RMB. That sum represents 1/5th of the total drawdown for 2015 in only 1/12th the time.
Obviously, drawing down reserves at that rate for the remainder of 2016 would significantly diminish China’s treasure chest.
The good news for now is that data from February 2016 revealed that China only used about $28 billion in the second month of the year (down from $100 billion in the month prior). The bad news is that the large disparity between January and February has made the release of the March numbers a highly anticipated event.
That data is expected to be released this week.
As for FXI, its IV is relatively low. That could make debit verticals potential opportunities for bullish (long call vertical) or bearish (long put vertical) trades.
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Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.