Haav Bline

China Rebalancing ETF Pair Trade

It seems most of the commentors does not do much research.

CAF are Shanghai A shares, average P/E is much closer to 60 than 20. So even at 20% discount to NAV does not automatically make it a screaming buy. You can argue the Chinese goverment willl not allow the A share market to crash, but it can correct by 20% easily and that will not be good for CAF.

The Short FXI - Long EWH pair trade does not make much sense either. FXI cantains major state own Chinese comanies without local Hong Kong companies. Most of them wer NOT available as A-shares before this year. Those FXI members who have issued A-shares so far has seen their A-shares traded at very large (50-100%) premioum than the H-shares (FXI) of the SAME company. Since the announced scheme, H-Shares has outperformed A-Shares even though the scheme has NOT started yet (delayed by Chinese gov). Free-rider has rush to buy H-shares before the Chinese are allowed to do so. Still, FXI trades at a much lower PE than A-shares, so it is reasonable to expect the Chinese to buy the H-Share first, simply because they know those companies.

The local Hong Kong stocks that are part of the EWH are trading at a still lower PE. You can have faith that they will benefits as well because they are better value than the H-share and even much better value than the A-shares.

There are only two paroblems left in this strategy:

1. The Chinese are not value investers, most of them are momentum investors. Low PE don't mean much to them.

2. The Chinese goverment set a limit to the amount of money that can flow to Hong Kong this way. They can increase or decrease that number at any time. The objective of the scheme afterall is to let off some hot air in the A-share market.

I have been long FXI for 2 years, I am not adding to my position, but not ready to short it. I have been adding positons to EWH for 4 months. May take profit of FXI but to more patient with the EWH.