Taking Advantage Of China's Stimulus Avalanche

China Panics, Moves To Prop Up Stocks

As ZeroHedge reported yesterday, the People's Bank of China announced a number of extraordinary measures designed to both stimulate the Chinese economy and prop up Chinese stocks: 

 PBoC Governor Pan Gongsheng unleashed what Bloomberg called a "stimulus blitz", and what we call "sheer panic", when he announced a bevy of stimulus measures to prop up the sinking economy and crashing stock market. Among these:

• The PBOC will reduce the 7-day reverse repo rate by 20bps.
• The PBOC will cut the reserve requirement ratio by 0.5%, a move that will free up1 trillion yuan ($142 billion) in liquidity, Pan said.
  • China may also cut the RRR further this year by another 0.25 to 0.5% at the appropriate time.
• The PBOC will cut the 1 Year MLF rate by 30bps
• The PBOC will also lower the rates for existing mortgages and cut the down payment ratio on second homes to 15% from 25%.
• The deposit rate will be lowered to "neutralize" the impact on bank margins.

“Monetary policy easing come bolder than expected, with both rate cuts and RRR cuts announcing at the same time,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “We see room for bolder easing ahead in the coming quarters, following the Fed’s outsized rate cuts.”

On top of that, the PBoC intends to provide a half a trillion yuan in liquidity support to Chinese stocks.

A stock we placed a bet on earlier this month should be positioned to benefit from it. 

The Chinese Lending Club 

The company is Qifu Technology, Inc. (QFIN), which is essentially a Chinese version of America's Lending Club Corporation (LC). Like Lending Club, Qifu Technology:

• Facilitates loans between consumers and financial institutions, 
• Utilizes big data and artificial intelligence to assess credit risk and offer personalized financial products, 
• And focuses on the consumer credit market. 

One would think all of those activities would get a tailwind from China's new stimulus. 

An Attractive Stock Even Before This Stimulus Was Announced

In the Portfolio Armor trading Substack, we placed a bet on QFIN earlier this month, before this stimulus was announced. We did so based on the stock's strong technicals and fundamentals. 

As I wrote there, 

This stock had been on my watch list for a while, and the one piece I was waiting for—price consolidation, as indicated by its Chartmill set-up rating—has fallen into place. The stock beat on both top and bottom lines when it reported last quarter, and here are some of its current metrics:

• Technical rating: 10

• Set-up rating: 8

• Fundamental rating: 7

• Profitability rating: 8

• Health rating: 7

• Growth rating: 7

• Valuation rating: 8

On top of that, it even pays a dividend of close to 5% annually. Not that we’re going to be holding the underlying stock here, but if it’s paying its shareholders money, that inspires a bit more confidence in the fundamentals.

The options market expects a move of about 12% in either direction when this stock reports in November. Our bet here is that that movement is going to be to the upside, and if we’re right, we could make a triple-digit gain.

Our trade there was buying the $25 strike calls on QFIN expiring on January 17th, for $2 each. Those were trading for about $2.25 as of yesterday's close. It's probably still a good entry price given the new tailwinds from the PBoC. 

I'm going to look for other Chinese names that may be worth adding here. If you'd like a heads up when my subscribers and I place a trade on one of those, feel free to subscribe to our trading Substack/occasional email list below. 

If you'd like to stay in touch

You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we're using that for our occasional emails now).