Option Traders Turn Most Positive on China Assets After Politburo Supercharges Stimulus

Investors are ramping up their bets on a recovery in Chinese shares, eagerly snapping up bullish options on U.S.-traded securities following China’s central bank announcement of a massive stimulus package. Shares surged in Asia trading after the People’s Bank of China and other financial officials unveiled measures aimed at bolstering the real estate sector and the broader economy.

In the options market, call volumes on the $4.3 billion ETF that links to the Chinese Large-Cap equities surged to the highest levels since February. One-month contracts betting on a 10% rise versus a 10% decline jumped to the highest premium since 2015 this week, after languishing at a deep discount in early August.

The largest trade on Thursday was an investor who spent $6.75 million on options to buy 15 million shares at $33 by mid-November, betting on a further rally. Meanwhile, the hottest option contacts traded for the ETF on Thursday were swamped by calls that expire around mid-October and November, signaling confidence in a long-lasting trend.

The high open interest at the $32 strike price is a strong indicator of bullish sentiment among investors regarding the ETF. They are expecting the stock to rise further in response. However, it also suggests a critical resistance level where price movements will be closely watched by both option holders and other market participants.

This buying spree extended to bullish options on most Chinese-related equities; multiple Chinese Adrs saw the most active option activities that had not been seen for months. Broader emerging-market funds also saw increased activity, with ETF that tracks the performance of MSCI Emerging Markets index call volume soaring to more than four times normal levels. With the ETF standing at roughly $46, investors were particularly drawn to $50 calls, equivalent to over 13 million shares expiring in December, about 11% above the current price.

China's top leaders caught markets off-guard by promising even more support for the economy, sparking hopes that policymakers are preparing the kind of fiscal stimulus that analysts say is crucial for the country’s recovery. The Politburo, China’s highest decision-making body, announced on Thursday that it will extend additional fiscal and monetary measures to boost the economy, according to state media Xinhua.

This announcement came just days after the central bank unveiled a series of aggressive easing moves. Senior leadership vowed to meet the country’s annual economic goals and urged officials to implement existing policies more effectively while rolling out new ones.

"Supportive policies, one after another, aren't pure coincidence," economists at HSBC noted. "It feels like Beijing is now 'striking while the iron is hot.'"

Officials also committed to preventing further declines in the housing sector and adjusting home-purchase curbs, a move economists believe could pave the way for bolder property-rescue measures in major cities. This marks the first time since the downturn began that the Politburo has explicitly targeted a property-market rebound, according to economists at Capital Economics.

These announcements might mark China's most audacious policy campaigns in decades, which together may finally help pull Asia’s largest economy out of its slump. "It shows Beijing cares," said Siguo Chen, portfolio manager at RBC Asset Management. "Whether these measures will be effective, that’s another topic, but admitting there’s an issue with the economy that needs to be addressed is the first step."

The long-awaited full recovery of the Chinese economy might finally be on the horizon. The CSI 300 Index is on track for its biggest weekly gain in nearly a decade after China’s top leaders pledged to increase fiscal support and stabilize the property sector to revive growth.

While these bold policy moves have been cheered by markets as a sign that China is finally getting serious about fixing its economy, some economists caution that the impact may be short-lived. "It takes two to tango," economists at Standard Chartered noted in a client briefing. Persistent doubts remain about whether these measures can address China’s long-standing issues, including weak consumption, falling prices, and an entrenched property crisis.

Most market watchers agreed that the simultaneous changes to multiple policy levers were encouraging. However, some warned that the rally might only be a tactical rebound. Persistent doubts remain about whether these measures can address China’s long-standing issues, including weak consumption, falling prices, and an entrenched property crisis.

On Thursday, a sudden reversal of the option skew for ETFs linked to Chinese large-cap equities from extremely bullish to slightly bullish might signal that concerns still remain among some investors. This temporary shift suggests that while there is strong sentiment for a recovery, not all market participants are convinced that the measures will result in a sustainable bull market.

The implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls. If the implied volatility for downside puts is increasing relative to upside calls, then that suggests the market is pricing in a larger fear of a downside move.

A long-lasting bullish sentiment for Chinese equities would need evidence of economic recovery and earnings improvement.

"Unless there is meaningful structural change, my sense is we’re going to have a situation in markets akin to Japan, where we have positive announcements followed by sharp rallies, then a lack of follow-through, and periods of quiet," said John Woods, Chief Investment Officer for Asia at Lombard Odier.