The china vs taiwan spread trade has done well in the short term with 7% gains over the last two days, but not for the reasons I discussed in the previous post. I noticed that the markets are cointegrated, however moves in the china market (both positive and negative) have a steeper slope, so that positive and negative moves are bigger with FXI than for EWT.
Given the current downward trend for FXI, the FXI – EWT spread contracted, yielding 7%. Of course should the trend reverse and FXI recover, would expect the spread to flip back to a widening phase.
I think a better trade at this point is a view towards continued growth in the indian market accompanied with a deflation of the chinese market bubble. Speculative trade: short FXI, long INP.