This week marked a 180 turn for the Chinese government. In one sweep, China’s main economic advisor, Liu He, announced the Chinese market has the support of the Chinese government.
What happened with my KWEB trade. As you’ll recall in a previous post, I began a position with a long $35 Jan ’23 call on KWEB. Since January, Chinese equities had trouble staying up and like all other global markets fell. February took out the bottom because of the Chinese-Russian relationship creating uncertainty on China’s stance on the Ukraine crisis.
Luckily, like I had mentioned on the previous post for what I would do if it fell, when resistance around $34 broke, I sold an ATM $32.42 Jan ’23 call for $6.00 premium to enter into a bear call spread and protect as much of the long call premium that I could.
Through sheer luck, I decided to buy back the short call for a premium of $3.50 on Mar 11th. Chinese equities had fallen so quickly so fast that I figured there would be a consolidation soon. KWEB fell another 10% over the next few days and on March 14th JP Morgan announced China, un-investable. Great thing to hear when you’re long on a position.
March 15th: KWEB Up 40%
On March 15th the announcement from the Chinese government brought back the position. KWEB was up 40%. The original call had cost 7.51, with the short call trade, my total cost comes down to 5.00 and break even to $40 on KWEB. I’ve got a small profit of $50 at the time of writing this post. Here’s what I’m looking for over the next few months.
Momentum
The Chinese stock market relies heavily on momentum. If you look at a chart of Chinese equities you’ll see these huge boom and bust cycles that happen. Most recently you saw a bust in their real estate sector but their stock market has experienced a similar phenomena over time. This is due to a number of factors.
The Chinese market is still fairly new. As the government has introduced capitalist policies over these few decades, China has experienced tremendous growth. Their financial sector is in its infancy so the CCP wants to make sure the development is controlled. The CCP wants to crackdown on shadow banking to make sure debt covenants are being controlled and no financial frenzies develop (see Ant Group).
Retail investors account for the majority of trading in Chinese equities. Because of this, the market tends to follow whatever trends are popular with the government. That’s why you saw such weakness in the tech sector even with improving fundamentals. The market is rich with fundamentally strong and growing companies trading at very cheap prices.
The Shift
The announcement by the government to support the financial markets means retail investors now have the go ahead by the government to take part. This could mean a bottom for names like BABA, PDD, TenCent and many others. I will look for a strong uptrend to develop over the next couple of months before I start adding to my position. On top of this I will keep monitoring China-Russia relations and the Ukraine crisis.
China can take a smart approach by playing both sides. Don’t directly undermine the US on diplomatic fronts and get a nice inflow of oil and commodities from Russia. This is a tight rope but if they play it well they could easily stay afloat. The West will be much more lenient on China but there is a line.
It won’t be good for trade relations but China has shown it has power in the global space. Not enough to take over as the leading global power but they do have substantial power.
Conclusion
Depending on the reason for any large drops I will look to enter a risk reversal and perhaps have short puts assigned. I should be able to get a nice premium and pay off the last of the long call to make it a zero cost position. I wouldn’t mind owning KWEB now that there has been a capitulation more or less. Of course, any news on Chinese-Russian support could throw off this position. For now, I’m comfortable with my exposure and risk management.
Work with me
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