China’s regulators and state-backed funds moved on Monday to steady A-share trading after global tech deleveraging and profit-taking rippled into domestic markets. The China Securities Regulatory Commission convened an investor symposium, pointing to tighter supervision, investor protection and stable market operations. In parallel, the “national team” channelled about ¥60bn into stock buyback re-lending, while centrally administered state firms purchased shares in SOEs, technology companies and ETFs.
Institutional flows into Chinese equities rebounded last week after selling pressure through much of June, with activity picking up as key market levels came into view. Retail behaviour has been more mixed, shifting from selling in early April to strong buying in mid-June and at times absorbing institutional selling, though recent momentum has softened. With official support in place, the renewed institutional bid is framed as an upside risk to APAC sentiment into month-end, ahead of the customary end-July Politburo meeting that is expected to set the growth agenda for the rest of the year.
Derivatives Strategies Leveraging State Market Support
We recommend that derivative traders capitalize on this state-sponsored safety net by selling out-of-the-money put options on major Chinese ETFs like ASHR and FXI. Since state-backed funds have a track record of stepping in at key psychological levels, the immediate downside risk for these indices is heavily mitigated. This strategy allows us to safely collect premium as implied volatility begins to contract following the recent global tech sell-off.
With the crucial end-of-July Politburo meeting approaching, we should also position for tactical upside by utilizing bull call spreads. Historical data shows that official backstops, like the massive $50 billion state-directed ETF buying spree in early 2024, often trigger sharp, short-term relief rallies. By using spreads rather than outright longs, we can cost-effectively capture this localized sentiment boost without exposing capital to China’s deeper, unresolved property sector issues.
Volatility Dynamics and Calendar Spread Opportunities
We must also prepare for a volatility crush in front-month options as the ¥60 billion liquidity injection stabilizes the A-share market. Because state buying heavily targets large-cap benchmarks and centrally-owned enterprise ETFs, index volatility is poised to drop much faster than individual stock volatility. Under these conditions, we suggest entering calendar spreads to exploit the premium decay in short-term options while keeping longer-term volatility exposures open for late August.
