How to Bet on the China Enterprises Index Spreads

Despite the small size of the country, the Hong Kong Stock Exchange is one of the largest in the world, and has been operational since the 19th century. The Hang Seng China Enterprises Index is made up of “H shares” listed on the Hong Kong Stock Exchange. The term H shares means shares of companies that are based in mainland China, but are traded on the Hong Kong Stock Exchange so if you wanted to take a position in Chinese stocks these could be the easiest. So to be clear, the China Enterprises Index is derived from stocks quoted on the Hong Kong stock exchange, but is made up of companies that are on mainland China. The Hong Kong Stock Exchange opens at 2.30am UK time and closes at 9.00am.

The China Enterprises Index itself is weighted by capitalization of the companies that are included on the H-share list, which means that larger companies have greater representation in the index. This index covers 25 of the bigger and most popular companies operating in China and include such names as China Mobile, China Construction Bank and CNOOC. As with all indices, the actual number is not related to particular share values, but was set at 2000 in the year 2000 when it was started. It has typically varied on average by a few percent a month, so it is less volatile than some of the other major indices you may be considering trading, although as with all indices recently it can still be considered volatile and therefore require careful spread betting with good risk control. It has been about 15% above and below its current level during the admittedly turbulent last twelve months of trading.

Is China still an Economic Powerhouse?

With the Western economy still in the doldrums, economists have been pinning their hopes on an emerging market-led recovery. However, a recent slow-down has led many to question whether this is possible in the near term. Much of the focus has been on the emerging power with the greatest prospects going forward: China.

With a burgeoning middle class, younger population and an economy that has outgrown its Western peers throughout the credit crisis, China has been a positive contributor to the global recovery. However, recent economic data gave some pause for thought.

China has historically relied heavily on its manufacturing and export sector to drive its economic growth. However, a slowdown in demand from key markets such as the US and the eurozone has hurt its growth in recent times.

China has historically relied heavily on its manufacturing and export sector to drive its economic growth. However, a slowdown in demand from key markets such as the US and the eurozone has hurt its growth in recent times. There had even been concerns over a soft landing for the Chinese economy. The economy grew at a slower rate in 2012, as did the rest of the world, during a year of uncertainty and a number of macroeconomic headwinds. However, it still outpaced Western economies by some margin and prospects for the Chinese economy are still good, with growth forecast to rise over the coming years.

Rebalancing is an important issue for the Chinese economy. Much of its growth has been export-led in the past, but with a large current account surplus, domestic consumption will play a much larger part in the economy. During the past decade Chinese authorities have been keen to develop greater domestic demand as the size of its middle class grows. A move away from dependence on foreign consumers would help rebalance the sector and leave it less exposed to the faltering economies of the West.

Asia Exposure

One way to acquire exposure to Asia is to trade mining shares that tend to respond sharply to how the Chinese economy is faring. In particular, stock prices of enterprises like Xstrata, Rio Tinto and BHP Billiton are very much positively correlated with Chinese metal demand and as such a solid and expanding Chinese economy is likely to push the share price of these companies higher. For instance, if a spread trader were to buy Rio Tinto stocks for £10 per point at a price of 3020p, and if Chinese growth improved such that Rio Tinto’s stock price subsequently rises to 3200p, the trader would stand to make £1,800 (180p x £10). Obviously if you believed that China is set for a hard landing, you could decide to short sell such mining companies.

Alternatively, some providers like GFT allows positions to be taken on the iShares FTSE China 25 ETF (FXC) which is also a good way to acquire exposure to the Chinese stock market. Some of the major companies that are included in and represented by the China Enterprises Index are in the banking and insurance sectors, which perhaps explains the recent fluctuations. The Industrial and Commercial Bank of China, the Bank of China, and the China Construction Bank are a major part of the index, which also includes China Life Insurance and Petro China.

Traditionally, China has been accused of keeping its currency – the renminbi – at lower levels, often by the US. Yet, much of the criticism has in the past few years been directed at Japan. However, the People’s Bank of China is reported to have started making moves to devalue.

The major caution to doing much spread betting on this index is that which concerns all of China’s companies – there have been many rumours that accounting procedures in China are not to the same standard as those of the Western world, and any company figures may be suspect. If there were revelations about this topic, then there is the possibility of major movement that could not be foreseen before the news became public.

However, you may be sure that the companies involved are working hard to prevent such disclosures, and to allay any fears, so there may be little to worry about. You may consider using guaranteed stop loss positions if you are of a nervous disposition, or believe that there are real problems.   It is also worth noting that China is also facing increasing competition from Japan, particularly due to its weakened currency which isn’t making it easy for Chinese exporters.

Once you have identified the traits of this index, you need to follow it for a time in order to see how it reacts to the markets and to international news. It is not as heavily traded as the major indices, and therefore you may see some impact from a lesser liquidity, which typically is mainly seen in the fact that there are larger spreads on the minor indices.

Bearing in mind the time zone of this market, it is possible that you will find that you are less able to spread bet on it when the market is open. As betting when the market is closed is usually accompanied by a larger spread, you need to take all these factors into account before deciding whether the China Enterprises Index would be a good one for you to bet on.

Observer Comment December 2012: The Chinese economy has been growing rapidly in the last few years but the economy has traditionally been dependent on exports and local investment which has led to a sizable economic imbalance. This has in turn led to a slowdown in the economy. Having said that there has been a definite improvement in conditions over in China, their market is in the crapper while business conditions improve to a nine month high. An opportunity for the brave soul, and also pretty good news for the rest of the world – Welcome Back China. Having said that very few people are cheery about China at the moment. The business surveys are suggesting growth might have stabilised, while the market on a whole trades on a 10-11 multiple of 2012 earnings.

Further to the China point, the Shanghai Composite is currently trading on 10.7 times 2012 earnings, while the US market trades on around 15 times. If you’re bullish on China in the long term, and you feel that 2012 earnings in China are a good conservative starting point (i.e you don’t think Chinese businesses will be flat, or will shrink on a whole over the next ten years), then you could certainly pick worse times to make an investment in the region. Of course, if you’re bearish on China over the next ten years, then 10.7 times is not a worthy price – but you’re not paying much for factored-in growth if you have any bullish inclinations on the country.

Ultimately China is run by the People’s Liberation Army and political change seizes up decision making in the system, impacting investment and growth levels which shows up in the data.

China Enterprises Index Spread Betting

The Hang Seng China Enterprises Index is an index of Chinese companies that are listed on the Hong Kong Exchange. If you thought that it was going up, and the current spread betting quote was 8917.36– 8937.36, then you could place a £5 buy bet at a price of 8937.36. This means that you will gain £5 for every point that the index rises.

The Chinese Enterprises Index is volatile, and prices change rapidly. The next time you check in the price has gone up to 9057.78 – 9077.78, and you decide to take your profit, which means you sell your bet at 9057.78.

You can figure out your gains like this: –

  • number of points that the index has gained equals 9057.78-8937.36
  • this works out to 120.42
  • as you bet £5 per point, you multiply these together to find your winnings
  • 120.42 times £5 equals £602.10, which is your profit.

With such a volatile index, you need to stay on top of the prices in order to avoid a big loss if the market does not go your way. Say instead of going up in the above example, the price dropped to a quote of 8901.57 – 8921.57, and you decided to close your bet before the losses increased.

You can work out your losses in the same way as the gains: –

  • number of points that the index has lost equals 8901.57-8937.36
  • this works out to 35.79 points
  • your bet is still £5, so again you multiply to find out how much you lost
  • 35.79 times £5 equals £178.95, which is how much you lost.

As you are simply betting on the price move, you can also bet that the China Enterprises Index will drop, and this is just as easy as betting on an up move. Taking the same starting quote of 8917.36 – 8937.36, you place a bet of £4 per point that the index will go down. Because it’s to the downside, the bet is placed at the lower number of the spread, 8917.36.

If you have figured it correctly, a little while later you may see a quote from your spread betting company of 8725.43 – 8745.43, and you can close your bet on the higher number of 8745.43.

The difference in points between the two numbers you placed and closed your bet on is 8917.36 – 8745.43, which works out to 171.93 point drop. You bet £4 per point, so that gives you £687.72 profit.

Once again, if you did not bet in the right direction, you can lose money too, at the same price per point. Say the Hang Seng China Enterprises Index went up after you placed your down bet, and your spread betting provider was quoting you a price of 9027.54 – 9047.54. Even though it’s gone up, you placed a down bet, so the price you close your trade at is 9047.54, the higher number.

This time you lost, and the amount you lost is the point rise, 9047.54-8917.36, which is 130.18, so at £4 per point you lose £520.72. Alternatively, if you have a longer term perspective futures on the China H-Shares Index are also possible although some speculators also trade the country indirectly via commodities, or through mining companies or the Australian dollar.

It is worth noting that some providers now also quote the CNH – which is the Hong Kong listing of the renminbi (the official currency of China) versus either the USA dollar or Japanese Yen. This is another interesting way to bet on the strength of the Chinese economy. The currency is still very much controlled by Beijing but the price isn’t fixed.

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