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How to Prep for More Declines in Chinese Stocks

This article was originally published on ETFTrends.com.

One of the primary reasons emerging markets stocks and exchange traded funds are struggling this year is slumping Chinese shares. Some traders are forecasting more declines for Chinese equities, which could benefit the   Direxion Daily FTSE China Bear 3X ETF (YANG) .

YANG looks to deliver triple the daily inverse returns of the FTSE China 50 Index (TXIN0UNU). Recently, the world's second-largest economy's latest gross domestic product numbers showed that economic growth slowed to 6.5% year-over-year in the third quarter, missing expectations of 6.6%.

The jitters in the country’s markets 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.

Although it retreated Wednesday, YANG surged more than 26% in October.

Concerning Divergence

Some traders are concerned about the growing divergence between U.S. and Chinese stocks.

“We have seen a lot of weakness recently, but the divergence that's been occurring between the S&P 500 and China is significant," Todd Gordon of TradingAnalysis.com said in an interview with CNBC. “And it actually goes back prior to this period of tariffs that are being applied.”

Some traders are taking contrarian views of Chinese stocks. YANG's bullish counterpart, the Direxion Daily FTSE China Bull 3X ETF (YINN) , is averaging daily inflows of $1.14 million over the past month, according to Direxion data. Over the same period, inflows to the bearish YANG are just over $91,000 per day.

“Despite a rough October, U.S. stocks have held up significantly better than their Chinese counterparts. In just this month alone, the large-cap Chinese stock-tracking ETF (FXI) has plunged 10 percent, amplifying the 'monster divergence' Gordon said has been occurring virtually all through 2018,” according to CNBC.

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