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Bulls Overtake Bears in Race Between Leveraged China ETFs

This article was originally published on ETFTrends.com.

China's latest GDP numbers may have slowed to 6.5% year-over-year in the third quarter, missing expectations of 6.6%, but the Direxion Daily FTSE China Bull 3X ETF (YINN) is up 4.56%. In turn, the  Direxion Daily FTSE China Bear 3X ETF (YANG) dropped 5.41% as of 3:00 p.m. ET.

The bulls overtaking the bears was evident in the biggest China ETFs based on total assets--iShares China Large-Cap ETF (NYSEArca: FXI) was up 2.07%, iShares MSCI China ETF (MCHI) rose 1.48% and KraneShares CSI China Internet ETF (KWEB) gained slightly at 0.10% as of 2:45 p.m. ET. The rise came a result of a rebound in Chinese equities as the Shanghai composite and the Shenzhen composite both surged 2.58 percent, while Hong Kong's Hang Seng index rose 0.51 percent.

Chinese regulators have already sought measures to defuse risks related to shares used as collateral for loans, while the recent declines in the country's stock market have created a good buying opportunity, Liu a member of the politburo of the ruling Communist Party of China, told the People's Daily - the party mouthpiece.

"In terms of global asset allocation, China's stock market already has a pretty high investment value, with bubbles significantly contracting, the quality of listed companies improving and valuations at a historical low level. I believe that investors will make a rational judgment," Vice Premier Liu was quoted as saying by Hong Kong-based South China Morning Post.

Chinese Officials Help Quiet the Noise

Chinese equities underwent a sell-off on Thursday, causing the Shanghai index to fall to a low not seen since November 2014. As a result, top Chinese officials from the People's Bank of China issued public statements to help quell the fear in the markets.

"The recent volatility in the stock market is mainly affected by investors' expectations and sentiment. In fact, China has good economic fundamentals, has made progress in preventing financial risks and has macro leverage ratio stability," said the Chairman of the People's Bank of China, Yi Gang.

China Securities Regulatory Commission Chairman Liu Shiyu issued a separate statement to help re-instill confidence in the capital markets.

"[We will] encourage local government-managed funds, qualified private equity investment funds, broker-managed products or newly organized funds, to help relieve the stock pledge difficulties of public companies with good prospects but are temporarily facing operational difficulties, so they can develop healthily," Liu said.

Related: China Economic Concerns Continue to Weigh on Copper ETPs

China Prepared for Extended Trade War with U.S.

Ongoing economic issues could put China in a precarious position if trade wars persist with the United States, However, a white paper published by China last month revealed that the country can economically withstand the effects of a long, drawn-out trade war between the two economic superpowers, but it took extra measures for preparation when the Chinese central bank cut the amount of reserves held by banks.

The move was announced when the People's Bank of China instituted a 100 basis points cut to the reserve requirement ratio for a majority of banks, resulting in a capital injection of 750 billion yuan or $109.2 billion to help shore up the banking system. The central bank confirmed that this latest policy move was done in accordance with the pace of the economy as opposed to an accommodative move.

Nonetheless, the words alluding to resiliency may be just that, according to some experts and that the situation is more dire than China is leading the markets to believe.

"China is probably facing its worst period since the global financial crisis. All news is against it," said Fraser Howie, an independent analyst who has covered China and its financial system.

"They certainly want to play down any talks of panic or near panic ... but they're clear it's not business as usual in China," Howie added.

Trade War to Cause a U.S. Recession? Ronald Temple, head of US equity for Lazard Asset Management, said trade wars could be one of the ingredients that could cause a U.S. recession. Temple recently told CNN Business that U.S. President Donald Trump's protectionist policies with respect to tariffs could cause an economic slowdown in conjunction with rising interest rates. "A recession in the near-term is not inevitable, but the risk of one by 2020 has increased substantially in the past few months," Temple said. "Take trade wars off the table and that significantly reduces the risk of recession." "The days where we could have a trade agreement where China just buys more US stuff are probably behind us," Temple  added. "It's difficult to find how China and the United States come to a common middle ground on trade."

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