A New Way To Bet Against China's Highest-Priced Stocks

China just introduced futures on the small-cap CSI 500 Index, and investors will now have a cheaper way to bet against some of China’s most expensive stocks. The CSI 500 has skyrocketed more than 47 percent in 2015 versus the 26 percent gain for the benchmark Shanghai Composite Index.

Lack of liquidity
According to Hao Hong, the chief China strategist at Bocom International in Hong Kong, the new futures contracts will allow investors to take advantage of volatile downward spikes in the CSI 500 that can occur due to lack of liquidity. “It’s a way to lock in gains from high-valuation stocks, as many of these stocks do not have liquidity when there is a selling stampede,” Hong recently told Bloomberg.

High valuations
Hong added that interest in the new contracts should be high, as valuations of CSI 500 stocks are more than twice those of the Shanghai Composite Index.
The CSI 500 has jumped an incredible 138 percent since the beginning of 2013, and CSI 500 stocks currently trade at a lofty 52 times reported earnings. The price-to-earnings ratio of the Shanghai Composite is only 20.

Attracting international interest
China introduced futures contracts on the large-cap CSI 300 just five years ago. The Chinese government’s introduction of futures contracts is part of a general effort to open up $7.1 trillion market to the rest of the world.
According to a survey by China’s Southwestern University of Finance and Economics, more than two-thirds of new equity investors in China have never even attended high school. The new, more sophisticated trading options that China has introduced in recent months is likely geared toward attracting more interest from international institutional investors.