weekly option strategy

Volatility Injects Life In Chinese Stock Markets

Friday, 06 July 2007 20:55:07 GMT  |  Richard Lee, Currency Analyst

Recap Of The Week’s Top Stories…

 

Set to rise to the top ranking in global IPOs, Chinese markets are reflective of the rising demand for assets, or financial interest, in the country.  Already slightly past the mid year mark, capital raised in the world’s fastest growing economy has exceeded previous forecasts rising to $52 billion or almost twice the expected amount. 

 

China Markets Set For Top IPO Ranking

Set to rise to the top ranking in global IPOs, Chinese markets are reflective of the rising demand for assets, or financial interest, in the country.  Already slightly past the mid year mark, capital raised in the world’s fastest growing economy has exceeded previous forecasts rising to $52 billion or almost twice the expected amount.  The recent release compared with issuance in major business centers around the world with issuances last year of $41 billion (Hong Kong) and $29 billion (New York).  Attributed to the big push seems to be domestic companies attempting to profit from the recent run up in stock valuations as investment interest mounts exponentially.  For the year, benchmark indexes moved higher by approximately 70 percent, following a surge of 130 percent in 2006.  As a result, with more deals ready to come to market, demand for the underlying currency will almost certainly be increased.  Subsequently, the situation could be a compromising one for the government as officials continue to restrain the near term appreciation of the underlying yuan.

 

Chinese Yuan Pares Back On Rising Concern Of Two Way Flow
For the second straight session, the Chinese yuan pared previous gains as market concern emerged over the possible two way trade of the underlying currency.  Although currencies already trade in a two way fashion, reality is harsher when it comes to the yuan.  Previously traders sided with the idea that mass speculation would keep the currency pair in a one way direction.  However, now government officials may be cracking down illegally obtained money used for market investing, another method of keeping highly speculative appreciation at bay.  According to officials at China ’s State Administration of Foreign Exchange office, enforcement is expected to be heightened in efforts to crack down on bank loans that have widely been misappropriated and used to invest in the market.  Not only would efforts be made to stop the practice, setting a precedent, the policy will also help to calm waters as the so called “hot money” leaves the market.  Nonetheless, the yuan remains relatively strong against the US dollar, trading at 7.5980 heading into the New York close. 

 

 

Chinese Yuan Accelerates Past 7.6000, Highest Since Revaluation

It seems that policy makers may now be giving into the overall pressure, realizing that an appreciation in the currency may help to alleviate economic problems that have emerged (notably consumer inflation).  The sentiment has bolstered speculation in the Chinese yuan as rumors have emerged that government officials may be selling dollars in order to boost the appreciation against the US dollar.  Here, a higher valued currency will help to alleviate accelerating consumer inflation which is running at a 3.3 percent clip in the world’s fastest growing economy.  As a result, the Chinese yuan was able to move past the 7.6000 for the first time since the revaluation decision was announced back in July of 2005, gaining to 7.5944 against the dollar and rising 9 percent since the fix was ditched for a more flexible trading currency.  Incidentally, the move is also being made, its seems in order to cut down on a highly publicized trade surplus and adjustments in creating China’s new mega fund.  The trade surplus has climbed to $22.5 billion in the month of May, a 73 percent improvement.

 

Another Step In Stabilizing China’s Financial Markets

Officials at the China Financial Futures Exchange introduced a new futures contract that would track the CSI 300 Index. Major investment hubs the world over have offered these products, primarily used to hedge adverse price movements in the underlying, for some time. The exchange laid out the standard rules for the contract’s trading. A few of the noteworthy attributes were: a 6 percent daily limit that would hold trading for 5 minutes followed by 10 percent limit; a limit of 600 contracts per investor for each contract month; and a clear allowance for the exchange to liquidate traders positions under certain circumstances. Each contract is valued by multiplying the index’s point level by 300 yuan; and to trade the contact, investors need to put up 10 percent of its overall value. Consequently, this will not be an investment vehicle for the average trader, rather a product that will be utilized by bigger institutions. While some regulatory officials are uncertain over how the product may affect the underlying equities market, it should help to protect against major losses and excessive volatility since short selling is not permitted in Chinese stocks. The exchange has not offered a date for when the contract will begin trading.

 

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