Shorts of China-heavy emerging market ETF increase above $1 billion

BLOOMBERG

Investors have added almost $600 million to bets that an emerging-market index dominated by Chinese stocks will lose money.
Short selling of the $71 billion Vanguard FTSE Emerging Markets exchange traded fund (ETF), which tracks an index heavy on Chinese A shares, surged in the past six weeks to $1.12 billion, or 1.6% of the fund, according to IHS Markit data. That leaves it the most shorted in 13 months, the data showed.
The surge in short interest on the Vanguard fund, the largest US index for emerging-market stocks, contrasts with other emerging-market ETFs that have a lower concentration in Chinese stocks, which have seen bearish wagers decrease.
The iShares MSCI Emerging Markets ETF has seen short-sold units drop to the lowest since September, according to Markit data. Short interest in the iShares Core MSCI EM ETF, which has the lowest allocations for Chinese stocks among its peers, is hovering near the lowest level since January.
Money managers who bet at the start of the year that China’s reopening will drive equity gains have been disappointed as stocks in the world’s second-biggest economy led a $500 billion selloff in emerging markets since January. The losses have come amid patchy economic data, rising geopolitical tensions and regulatory risks.
The Vanguard fund has tumbled 8% from a peak in January, underperforming its benchmark FTSE EM All Cap China A Inclusion Index on a one-month as well as three-month basis. As many as 2,495 of the gauge’s 4,552 stocks are Chinese.
Among the top 10 holdings of the Vanguard fund are Tencent Holdings Ltd, Alibaba Group Holding Ltd, Kweichow Moutai Co, Meituan and China Construction Bank Corp. The ETF offers a dividend yield of 2.6% compared with 3.2% on the MSCI Emerging Markets Index.

Cautious start awaits China stock traders
A jump in holiday spending may do little to give Chinese stocks a much-needed boost. Trading in mainland equity markets is likely to kick off on a downbeat note when investors return after the Golden Week holiday, with any gains in consumer stocks expected to be short-lived, according to investors. A gauge of Chinese shares listed in Hong Kong has dropped as much as 1.7%, led by technology stocks.
Traders are searching for the next catalyst for Chinese equities as the buzz surrounding the earnings season and a key political gathering fades. Companies reported a mixed bag of results, and focus is shifting back to the geopolitical risks and China’s uneven economic recovery.
“Tourism, restaurant and consumer-related stocks may rally but there is great uncertainty over how long that will last over the next few days,” said Shen Meng, director at Chanson & Co in Beijing. “Shares connected to the manufacturing sector will fall given that the official manufacturing PMI is in contraction.” The benchmark CSI 300 Index has declined for three straight weeks, the longest losing streak since February, reflecting its waning momentum since posting a 20% gain in the three months through January. Much of the optimism was generated by the reopening of the economy but data suggests patchy recovery and lagging industrial activities.
Although the non-manufacturing sector remains resilient, the manufacturing industry posted a surprise contraction in April. Meanwhile, data showed millions of Chinese travellers thronged major cities and tourist hotspots across the nation over the Labour Day break, pointing to a recovery in consumption. A US-listed ETF tracking an onshore benchmark of Chinese shares has fallen along with the Nasdaq Golden Dragon China Index in the past two days.