The largest U.S. exchange-traded funds tracking Chinese stocks sank on concern the nation's equity markets will retreat after posting world-beating rallies as policy makers take measures to slow gains.
The iShares China Large-Cap ETF (FXI), tracking Chinese companies trading in Hong Kong, dropped 4.2% Friday for the steepest decline since January. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) tumbled 5%, the most in four months. A Bloomberg index of the most-traded Chinese equities in the U.S. headed for its first weekly decline since the five days ended March 13.
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U.S.-traded ETFs and stocks followed the FTSE China A50 Index futures lower after policy makers banned the margin-trading businesses of brokerages from using so-called umbrella trusts and allowed fund managers to lend shares to short sellers, statements showed Friday. The changes follow advances of 23% in the Shanghai and Hong Kong stock indexes over the past month, the best performances among 93 global benchmarks tracked by Bloomberg.
“The policy intention is to slow the market growth,” Clem Miller, an investment strategist at Wilmington Trust, which manages $80 billion, said. The rally is “really leverage-driven, and the Chinese authorities are keen not to repeat some of the mistakes the U.S. had in terms of leverage a few years ago.”
BEARISH TRADING
Investors have used umbrella trusts, which allow for more leverage than brokerage financing, to ramp up wagers on Chinese stocks. Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest.
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Allowing funds to lend their stock holdings will expand the pool of equities available to short sellers, who have relied primarily on brokerages to supply them with the stock needed to execute the bearish bets.
The $7.4 billion iShares China Large-Cap ETF sank to $50.03, erasing a gain for the week.
Deutsche Bank AG's $1.2 billion fund, the biggest in the U.S. tracking mainland stocks, tumbled to $44.8 and suffered its largest weekly drop since the beginning of March.
FTSE China A50 Index futures for April delivery tumbled 6%, while contracts on the Hang Seng China Enterprises Index lost 2.5%.
Tarena International Inc. led a slump in Bloomberg's China-US index, which fell 1.7%. Tarena, a Beijing-based professional education company, sank 7.3% to $12.29. Sohu.com Inc., an Internet portal operator, fell 3% to $61.82.
