Thursday, June 30, 2011

Time to short China? (FXP,YANG)

Are we on the verge of a bubble burst in China? Maybe, maybe not. But a lot of smart money is betting against China right now. The Masters recommend FXP or YANG, (inverse China ETFs)

Jim Chanos , the well-known short-seller and vocal China bear spoke last month of not finding enough available shares to short some U.S.-listed Chinese companies with questionable accounting practices. Just a week after his interview, a short seller's report on a U.S.-listed Chinese timber company sent its stock tumbling 90%.

The rush of traders making bearish bets on Chinese stocks is the latest evidence of growing trend among smart money: if you're not bearish on China, you're missing the next big trade.

Of course, Chanos has been saying this since 2009 when his analysts studied China's building boom, leading him to call it "Dubai times 1,000." Edward Chancellor at GMO in Boston and independent economist Andy Xie also began predicting that year that China would soon stumble.

But more recently the chorus has been growing. Billionaire George Soros said this month China might be in a small bubble, Hong Kong's outgoing securities regulator called it "the new dot-com," and soothsayer economist Nouriel Roubini recently repeated his thinking that China's government will be powerless to stop a downturn caused by dubious real estate projects and poor fixed-asset investments after 2013.

Mastery Bottom Line

As we have started to uncover fraudulent accounting in China, it's possible that the frauds (or really, fraud discoveries) will turn into what we had after the Internet bubble in the U.S. (Enron, WorldCom, HealthSouth, Global Crossing, etc.). If that's the case, there's a real possibility that the Chinese equity markets have a signficant drop lower.

However, playing with leveraged inverse ETFs like FXP and YANG are risky business. Decide for yourself whether the risk/reward ratio is worth it for your portfolio.


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