This time, "Dr. Doom" foresees a hard landing for the Chinese
economy after 2013. But, as investors well know, the market may
move sharply before the data show a full-blown economic
I think it's important to note that, when it comes to China, the
ETF market affords investors shorting possibilities that don't
really exist in the world of individual stocks.
Despite the difficulty of shorting well-known Chinese stocks
such as Renren (
) or Shen Zhou Mining & Resources Inc. (
), as FT highlighted in a recent piece, there are plenty of ways to
short Chinese equities using ETFs.
This could turn out to be another special quality of ETFs. But
that's putting the cart before the horse, because first you have to
decide that you do, in fact, want to short China. Moreover, as I
said, what's needed before all else is an appetite for risk and a
bit of creativity.
The most straightforward options are three inverse ETFs
currently trading:the ProShares Short FTSE/Xinhua China 25
(NYSEArca:YXI), the ProShares UltraShort FTSE/Xinhua China 25
(NYSEArca:FXP) and the Direxion Daily China Bear 3X
These three funds, respectively, offer single-, double- and
triple-inverse exposure to the Chinese market via two different
indexes, including the one on which the $7 billion iShares
FTSE/Xinhua China 25 Index Fund (NYSEArca:FXI) is based.
Of course, with any leveraged fund, you have to be ever mindful
that most of them-including the three I mentioned-rebalance daily.
That means their returns can deviate significantly from their
underlying indexes, as the chart below shows.
Over the past year, as FXI returned 4 percent, the
single-exposure inverse fund, YXI, fell 12.8 percent. The
double-exposure fund, FXP, lost an astounding 26 percent. These
crazy numbers show that managing these kinds of funds can be too
tall an order for many investors.
Here's another crazy fact that makes me wonder if things aren't
a bit unhinged at the Securities and Exchange Commission:You can
own an inverse ETF in an IRA, and yet outright short selling is
prohibited in such retirement accounts. Go figure.
Shorting FXI And Other Options
But in the right kind of nonretirement account, an alternative
to these daily rebalanced inverse leverage funds is an outright
short sale of a long China ETF. And, no fund is easier to do that
with than the highly liquid FXI.
The truth is there are a host of China ETFs investors could
short, such as the PowerShares Golden Dragon Halter USX China
Portfolio (NYSEArca:PGJ) or the SPDR China ETF (NYSEArca:GXC). And,
ETF traders will tell that if you're dying to short a China ETF
that isn't terribly liquid, an authorized participant can just
create new shares, as long as the order is big enough.
Also, put options are available on both FXI and PGJ, providing
another avenue to make a short bet on China, albeit with a bit more
risk and leverage.
Again, this requires options trading authorization and the
sophistication necessary to trade them effectively. But, if
investors are looking to make a tactical market call as contrarian
as shorting China, they're likely to want to have as many arrows in
their quivers as possible.
As Jim Chanos, president of the New York-based hedge fund
Kynikos Associates, argued in an appearance on CNBC last month,
China is headed for a collapse based on an "unsustainable growth
path and overindulgence."
Chanos said 70 percent of the Chinese economy is based on fixed
investment, while the emergence of a "consumer economy" so many
analysts have been predicting hasn't really materialized. In fact,
the consumption share of GDP in China is actually
If Chanos turns out to be right, the devastation to the world's
economy related to a Chinese hard landing would be profound.
Resource-rich countries that have benefited most by selling raw
materials to satisfy China's insatiable hunger stand to experience
the greatest level of pain.
Australia, for example, is a resource-rich developed country
that has benefited hugely from its proximity to and trade
relationship with China, as the world's most populous country has
sucked in all kinds of materials to build infrastructure and real
estate. Australia's whole economy and its currency have been on a
tear in the past decade.
So if China unravels in any major way, a short position in
either the CurrencyShares Australian Dollar Trust (NYSEArca:FXA) or
the iShares MSCI Australia Index Fund (NYSEArca:EWA) would be two
viable short plays that might make sense for bold, high-conviction
As with FXI and PGJ, EWA and FXA have options contracts, which
give investors with a higher risk tolerance the opportunity to
short with leverage.
The point is, if you believe China's economic miracle may be
running its course before long, you've got plenty of shorting
options. So, now's the time to do your homework.
Don't forget to check IndexUniverse.com's ETF Data
2011 Index Publications LLC
. All Rights Reserved.