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Contrarian Alert: Why is Everyone Betting Against China?
11/3/2011 6:35:00 PM
(List compiled by Eben Esterhuizen, CFA)
According to The Economist, shorting China is “in vogue,” and all the cool investors are doing it.
The Short Story
Once upon a time, China’s double-digit growth could do no wrong. The country’s GDP would grow indefinitely, take over the world, and any criticism to the contrary was ignored, or flat-out mocked. How could China fail?
Well, those days are over. The government is reining in growth and reducing spending to bring the country to a sustained slowdown. But economists and analysts are skeptical it will go smoothly. Any investors who hold out hope China will avoid a hard landing are today’s contrarian thinkers.
“The view that China is heading for a sharp slowdown has now caught on. Few go so far as to predict an Emirate-style crash, but talk of a ‘hard landing’ is rife. Concerns abound that a sharp Western slowdown could cripple demand for Chinese exports, that shadow lending and local-government debt are out of control and that property prices are bound for a correction. Fraud allegations against several Chinese firms have made investors jittery, too.”
The Economist goes on to quote Société Générale which recently released a report saying China is the “world’s most crowded short.”
Hong Kong’s Hang Seng index has dipped by over 29% so far this year, putting some good money into the pockets of short sellers.
China’s derailed growth is expected to hit several industries, but none more so than construction. “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.”
Talks exist of banning shorts in Hong Kong, a regulation rarely adopted and only so in times of dire circumstances. Most recently in August, Europe announced that short-selling of stocks would be temporarily banned in several countries (Italy, France, Spain, Belgium) in an effort to stop the tailspin in the markets.
Given the extreme pessimism surrounding Chinese names, we wanted to find a few examples of this trend.
Below we list U.S.-listed Chinese companies that have seen an increase in shares shorted over the last month (i.e. short sellers are betting on price declines).
In addition, institutional investors have been dumping these stocks during the current quarter.
If you’re a contrarian, this extreme pessimism should raise a flag. Use this list as a starting point for your own analysis.
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