China A-share

KBA vs FXI
Into MSCI announcement on June 20, KBA (mainly china A-share) was underperforming FXI (mainly Hong Kong H-share) by 4.5%.

China A-shares tend consistently to have a premium to China H-share (off shore investors asking a discount for the risk) http://www.ftserussell.com/sites/default/files/research/arbitraging_the_chinese_a-shares_and_h-shares_anomaly_final.pdf

Therefore the trade has been buying KBA vs FXI in equal cash amount as the two ETFs have similar volatility.

Finally today the two series converged so for quick arbitrage profit taking is recommended

I will continue to watch KBA closely as it rest on a very important resistance and a break to the upside could bring strong appreciation if it attempts to close the gap (12$, a 38% appreciation!)

An important development has been the appreciation of the Keqiang Index, a proxy for Chinese growth: "Historical Chart change in bank lending, rail freight, and electricity consumption. This ticker takes a weighted average of annual growth rates in outstanding bank loans "

The index is a leading indicator with a greater than a 1y lead. If we trust the relationship then Chinese shares should appreciate over the coming year.

Below you can see that both FXI (orange line) and KBA (Green line) need to catch up.

Happy summer trading.