After decades of impressive economic growth China’s economy is not only slowing down but may be in danger of collapse. The question one might ask is how to short the Chinese economy. Profit Confidential addresses the issue of a possible China economic collapse.
The billionaire short seller, Jim Chanos, has often worried that China’s economic collapse is right around the corner. Last year’s stock market crash proved he may have a point, but how would we know when the economic collapse is here?
He says China’s problems are eerily similar to what went wrong in the United States a few years ago: reckless banking activity helped create the conditions for a crash.
“If we learned anything…during our crisis, it was you shouldn’t finance hard-to-value long-term esoteric real estate-related derivatives or securities with overnight money, which is what a lot of the investment banks ended up doing by ’07/’08,” he said. “They couldn’t move a bunch of the gunk on their balance sheet and increasingly they were financing themselves in the repo market.”
Chinese banks apparently are holding $300 of debt for every $1 of equity. When this financial house of cards collapses it won’t be pretty. From an investment point of view how can we short the Chinese economy?
What Is a Short?
According to Investopedia short selling means you borrow money to sell stock with the expectation that you can buy the shares back at a lower price.
When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
There are Chinese stocks listed as ADRs on American exchanges and Chinese stocks trading on the Hong Kong stock exchange. Any of these that seem overpriced might be choices to short as a proxy for the Chinese economy.
Other Proxies for the Chinese Economy
Nearby economies are perhaps being hit worse than China by its slowdown. Bloomberg says the deceleration of China’s economy hits nearby economies hardest.
Those nearest to China are among the hardest hit as growth in the world’s second-largest economy grinds to the slowest pace in a quarter century.
Hong Kong, Macau, and Taiwan all saw their economies shrink in the first quarter, while Mongolia’s commodities-fueled boom has faltered. And the bad news doesn’t stop there.
How to short the Chinese economy most effectively may well be to select a Taiwanese computer chip manufacturer, a Macao Casino operator or a Hong Kong bank. As always do your own homework before investing or before you short the Chinese economy.