Chinese equities, which rallied to their best day in 16 years, started to test the limits of investor enthusiasm during U.S. trading hours on Monday.

The $4.7 billion iShares MSCI China ETF (MCHI) was roughly flat in midday trading, losing some of the ground it gained after the Chinese central bank announced a sweeping stimulus package last week. MCHI is up more than 18% over the past five trading days, accounting for most of its year-to-date gains.

Chinese equities rallied after the People's Bank of China said it would lower the benchmark interest rate and reduce the amount of money banks must allocate for reserves as it aims to boost lending and fix its sagging economy. It will also offer about $70 billion in loans to brokers, funds and other financial services organizations to purchase Chinese equities.

The $4.3 billion iShares Trust China Large Cap ETF (FXI), fell about 1% on Monday, although it is up nearly 15% over the last five trading days.

Paul Schatz, president of Heritage Capital in Woodbridge, Conn., compared to the recent rally in Chinese stocks to what happened with U.S. equities in 2008, “but that may be just grasping for comps.”

“Chinese stocks were heavily shorted, and the initial move squeezed those investors like they haven’t seen in years,” he said. “Two days later, the squeeze came again and then again. These are the kinds of moves that just puts funds out of business if they short.”

Bearish China ETF YANG Gains

Meanwhile, there is a sign of life for an ETF that shorts Chinese equities. The $158 million Direxion Daily FTSE China Bear 3X Shares ETF (YANG), which is down more than 42% over the past five days and nearly 68% this year, climbed more than 3% in mid-day trading Monday.

“The move in the Chinese equity markets has definitely been significant with markets up over 20% since the announcement last week of stimulus measures,” said Stephen Kolano, chief investment officer at Integrated Partners in Waltham, Mass.
“While the near term reaction has been very positive, given the size and opaque nature of the Chinese property market, and the fact that much of it sits at the local authority level, it is still very unclear as to whether the stimulus announced will be enough to help kick-start the property market sustainably,” he added.

Chinese equity markets went through a similar ride in May following the last round of economic stimulus aimed at getting ahead of a deflationary threat.

“The move in Chinese risk assets is understandable given the raft of fiscal and monetary policy initiatives announced by Chinese authorities of late, including an interest rate cut, lower cash reserves for banks and loans to funds, brokers and insurers to buy Chinese stocks,” said Tim Holland, chief investment officer at Orion in Omaha, Neb.