Want To Short China Now? It's Already Too Late

Business Insider analyzes the increasing bearish view of the Chinese economy and the practice of selling securities, “shorting”, Chinese investments:

After this almost-year-long underperformance of Chinese equities in Hong Kong vis-à-vis the US, for example, the bearish bets we bears have been making for a year or so have been paying off very well even though the Chinese economy has not “collapsed” yet.  At the beginning of this year, shorting China was among the most contentious investment ideas.  Now, it is no longer as contentious as it was at the beginning of the year.  When the proposition loses a certain degree of contentious nature, it means that those bets are no longer as cheap as they were 10 months ago.  And don’t forget that even the most epic bear market would surprise investors with occasional huge rallies from time to time.  Being long in China is risky, but getting into the short now might be just as risky.

Of course, if you are now very convinced that China will “collapse”, whatever it means, there will certainly be downside.  But be aware that you have already lost the best time window to make bearish bets.  Sorry, but yes, you are coming in a little bit too late.

Jim Chanos, the president of Kynikos Associates, shared his pessimism on China’s growth in this video:

An article in the Economist also highlights the growing talk of a “hard landing” in China’s near future.

Pessimists have focused on industries that would be hardest hit by government tightening or a sustained slowdown, which means property and construction companies in particular. Anhui Conch Cement, China’s largest cement manufacturer, is the most commonly shorted Chinese company listed in Hong Kong. Commodities such as copper have also been battered recently, as have financial stocks. Some investors are more creative. Mark Hart of Corriente Advisors, a hedge fund, has bought put options on the yuan, betting that the value of the currency will decline. Mr Hendry has purchased credit-default swaps on Japanese firms that are heavy exporters to China.

Pessimism has proved profitable recently. Hong Kong’s Hang Seng index has dropped by more than 29% so far this year, more than the French and Spanish stockmarkets. Mr Hendry’s “short China” fund was reportedly up by nearly 40% in the year to August. Messrs Chanos, Hart and Hendry had positions in place for a while before there were any signs of China wobbling, however. Without a sustained fall in asset prices, it is unclear whether they will make back much more than they spent.

An executive at a large hedge fund that went “net short” on China in the spring says that the trade is riskier now that equity prices have declined so much. “If you’re shorting shares at seven to eight times earnings, it’s a bold bet,” he says. Investors face the additional risk of being caught in a “short squeeze”, when the price of a stock is pushed up and short-sellers have to cover their positions. Regulators could also intrude: there are calls for a ban on shorting in Hong Kong. Needless to say, that hasn’t stopped the bears from warning that China has further to fall. Mr Chanos, who has never been to China, is rumoured to have a trip planned this month to Hong Kong. He will get a more admiring reception now than he would have 12 months ago.

October 10, 2011 9:47 PM
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