The proposal might ease some pressures on businesses, but it could add more strain on banks. These banks are already dealing with rising loan losses, which could get worse with the introduction of short-term loans.

Market Volatility

This new plan to help local governments pay off debts is a significant event in the market, and we are starting to see increased volatility. The Hang Seng Tech Index volatility tracker has risen almost 12% in the last two trading days, showing uncertainty about how this new liquidity will impact the market. We should get ready for big price changes in Chinese-related assets by exploring options strategies that can profit from this volatility. The size of this lending indicates a huge amount of yuan entering the system, which might put pressure on the currency. We recall the market shock from the managed devaluation in 2015. Although this situation is different, it could still lead to a weaker yuan. The offshore yuan has already fallen to 7.42 against the dollar, its lowest in over a year. Therefore, we are considering call options on USD/CNH to protect ourselves against or benefit from further declines.

Policy Impact on Sectors

This policy clearly affects different sectors differently, making it a good opportunity for a pairs trade. Banks are now taking on risky, low-interest debt, while industrial and construction companies will finally receive payments, which might improve their performance after a reported 5% drop in industrial profits year-over-year in August. We see a chance to buy call options on ETFs focused on materials while also buying put options on a Chinese financial index. With businesses getting paid what they are owed, we can expect construction and property projects to resume. This will increase the demand for industrial commodities, as China’s consumption shapes global prices. Iron ore futures for delivery in three months have already risen 8% to $122 per tonne this week. We believe this rally has more room to grow, making call options on base metals increasingly appealing. Create your live VT Markets account and start trading now.

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