Game Plan for Monday’s Chinese Market

by LiquidityMan

According to just about every news outlet, the Chinese government will be infusing 174 billion of liquidity into the market in about 8 hours.

News Recap

If you haven’t read it yet, here’s the article.

There is no amount of effort the government can make at this point to prevent the tidal wave of sell-off that will occur. People need their money, companies need to stay afloat.

The only major affecting factors that could happen, and are not likely, is that the markets do not open again and/or the government prevents stockholders from selling.

There will be no further delays to the reopening, the securities market regulator said in an interview in the People’s Daily newspaper on Sunday.

That’s one scenario out of the picture. The other is highly, HIGHLY unlikely and in any case, if they did, either it would only add to the surmounting volitility and negative market sentiment.

What they are doing is preventing short selling. See this article.

This could potentially pigeonhole additional stockholders and traders into selling. We will see.

Another Perspective

Imagine you are a business owner or private citizen in China right now. In many regions, you are barred from working and isolated in an almost house arrest state of affairs. Your finances are unstable because you have been out of work on a mandatory extended vacation while a new strain of virus runs rampant over your country.

“We can’t work and have no income. I would rather work than stay at home and do nothing,” said 32-year-old restaurant worker Wu Caixia in Beijing.

Now, the markets are opening up, but with restrictions. You can sell. You can buy. You can hold. That’s about it. No speculation. No bullshit. You have a straight exit to liquidate and get your money to help you and your family get through this uncertain and fearful time. What do you think people will do?

What’s Going On Now

Uncertainty of the viral situation is still prevalent according to this update.

The vice governor of China’s Hubei province, Xiao Juhua, said the virus outbreak was still “severe and complicated”.

Hong Kong Financial Secretary Paul Chan said the risk of further contraction in the region’s economy, which was buffeted by anti-government protests last year, has increased due to the epidemic. Catering, retail, tourism and consumer sectors, which have been hit in the last six months, would “fall into a deeper winter”, Chan said.

Many companies are extending their work suspension voluntarily through the better part of February.

China Evergrande Group, the nation’s third-largest property developer, said in an internal note it would extend its Lunar New Year holiday to Feb. 16, and suspend construction work at all of its 1,246 sites until Feb. 20.

Evacuations and Travel Bans

Forgive the extended quote here, but it is pertinent to understand the complexity of the situation and evolution of events as they unfold.

However, a string of countries have ramped up border controls. Singapore and the United States announced measures on Friday to ban foreign nationals who have recently been to China from entering their territories, and Australia followed suit on Saturday.

Russia will start evacuating Russian citizens on Monday and Tuesday, Interfax and TASS news agencies reported.

The Philippines expanded its travel ban to include all foreigners coming from China, widening an earlier restriction that covered only those from Hubei province. Indonesia also barred visitors who have been in China for 14 days.

More than 100 Germans and family members landed in Frankfurt on Saturday after being evacuated from Wuhan. Two of them had the virus, adding to the eight cases in Germany already in quarantine. About 250 Indonesians were also evacuated from Hubei.

Japan plans to send another chartered plane mid-week or later to bring back Japanese nationals who are still in Hubei, its foreign ministry said on Sunday.

Japan has barred foreigners who have been in Hubei from entering the country. South Korea will impose a similar entry ban from Tuesday, Prime Minister Chung Sye-kyun said.

From the same Reuters article

What’s The Game Plan

At this point you should already be invested in a variety of shorts on Chinese stock and ETFS. Some of these include:

  • Puts on FXI
  • Puts on YINN
  • Calls on YANG (an inverse fund)

I am a big fan of hedging risk by shorting funds rather than individual stocks, but some of those may include:

  • BABA
  • LK
  • NIO
  • TCEHY

While others may prefer airline stocks or financials, you probably will not go wrong in any case judging by the severity of the current climate. Chime in and I will update with adding in your choice stocks/funds

Am I Too Late?

I don’t think so. As things have progressed, the market is looking ripe for additional sell-off. It is likely that you will be able to get in on Monday or another day this week and still profit in the weeks to come. But do understand the risk you are taking having not been ahead of the curve by shorting the market last week.

You may be able to safely short the American markets at this point as well. Production lines are forecast to be highly disrupted from companies operating in China.

Amount To Sell

Originally my plan for this was to sell off 100% of my puts for tomorrow after Shanghai markets open up. I shifted to 50% late last week and now I am calling a 10-20% sell, to hold the remaining amount for further market sell-off.

This may change, but for now let’s stick with it and see how Shanghai markets react later today. I may change my forecast to hold all puts.

Early Expiration Puts

If your puts expire this week, I would highly consider getting out no later than Wednesday to protect yourself from market pushback. I always try to err on the side of caution, but play it by ear. I don’t want to see you retards lose on a great play so close to proper execution.

Additional Resources

Previous Posts

More Than Half of China Will Shutdown Until Feb. 10th

Short the Chinese Market

Volitility Buildup In Chinese Market

Consolidated Chinese Market Buying Guide

Official Info

Johns Hopkins Interactive Viral Map

The numbers on here are updated twice daily and are sometimes up to 6 hours old. While it is a handy visual aid, do not rely on it’s numbers to get an accurate picture.

Final Thoughts

Remember, Shanghai will be opening at 8:30pm EST today. Set your watches and clench your buttholes, this week should be extremely exciting.

Yours truly, LiquidityMan

Tl;dr – Sell 10-20% of your puts tomorrow, possibly 0% depending on market conditions. Market outlook is uncertain, prime for additional sell-off. May not be too late to get in on shorting the market.

Updates

5pm EST – It looks like the Chinese government has done two additional things:

  1. They are moving to prevent their citizens from shorting the stock market.

China has taken steps to limit short-selling activities as the country’s financial markets prepare to reopen on Monday amid an outbreak of a new coronavirus, three sources with direct knowledge of the matter told Reuters

  1. They are preventing sales of stock bought on margin.

The sources said China Securities Regulatory Commission (CSRC) had issued a verbal directive to brokerages including Citic Securities Co. and China International Capital Corp. to bar their clients from selling borrowed stocks on Feb. 3.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.