FXI Bears Rebuild as Options Traders Turn Bullish

FXI — the iShares China Large-Cap ETF — is sending contradictory signals this week: short sellers are adding positions again after a week of heavy covering, while options traders have turned more bullish than they have been all year.

The covering wave that dominated the first half of June has stalled. Short interest dropped sharply from above 39% of float in early June to a trough near 27% by June 11 — a move captured in the previous note on this ETF. But the direction has now reversed. Short interest climbed back to 28.9% of float by June 16, rising roughly 6% in just two sessions. That snap-back is notable given how aggressively bears had been retreating. The one-month change is still positive at +13.6%, meaning more shares are short today than a month ago — the covering episode was a trim, not a capitulation.

The borrow market, however, continues to tell a calmer story than it did in late May. Availability has loosened substantially from the near-complete squeeze of June 1, when availability sat at just 4.3% with the entire lending pool spoken for. It now stands at 78%, meaning roughly one share is available for every 1.3 already borrowed — a far less pressured environment. Cost to borrow has also eased sharply, falling to 0.64% from the 1.18–1.27% range that prevailed through late May and early June. The lending market is no longer in stress. But availability has tightened again from 85% a week ago, and the short interest uptick suggests fresh demand for borrows is returning.

Options positioning is the clearest divergence from the short-side rebuilding. Call appetite has surged — the put/call ratio dropped to 0.81, nearly three standard deviations below its 20-day average of 0.88, making this the most call-skewed reading for FXI in the past year. The 52-week low on the PCR is 0.71, so the current level is approaching that extreme. Buyers of calls at these levels are expressing more directional optimism on Chinese large-caps than the options market has seen in twelve months — a sharp contrast with short sellers moving the other way.

Institutional flows add another layer of complexity. The most recent Q1 filings show Morgan Stanley as the largest reported holder with 14.1% of shares, but trimmed its position by 4.7 million shares in the quarter. UBS Asset Management cut even harder, shedding 9.2 million shares. On the other side, Citigroup added 6.3 million shares, Goldman Sachs added 2.9 million, and Brevan Howard — the macro hedge fund — reported a new position of 6 million shares as of March 31. Brevan Howard's entry is worth flagging: macro funds don't typically hold ETF positions for yield. That is a directional trade, and it was sized at roughly 3.6% of FXI's shares.

The ORTEX short score for FXI is running at 67.2, a level that has held in a tight band between 65 and 68.5 for the past two weeks. It does not flag an imminent squeeze, nor does it suggest the short position is becoming comfortable. The ETF itself is down 4.5% over the past month and off 1.6% on the day, trading at $34.56. What to watch next is whether the short interest rebuild accelerates through the end of the week — if bears are reloading in earnest while call buyers are simultaneously adding, the tension between those two camps is the setup heading into whatever the next macro catalyst for China turns out to be.