China, Best Short Of The Year?

I don't want to seem 100% focused on China only, but it appears that after the past several posts on China, I had to look for a way to short China. So how lucky did I find myself when I stumbled upon the report titled China: Best Play Of The Year? on IndexUniverse.com?

Firstly, from a contrarian perspective, this already sounds like a perfect short (best play of the year?!). Looks too much one-sided already.

Secondly, the report lists several ETFs, including sectorial ones, that make a perfect vehicle for shorting China. Remember, one cannot short Chinese A-shares yet. So we have to find for other ways to do so and work around that limitation. H-shares for listed companies in Hong-Kong or S-shares for listed companies in Singapore are normally the first proxies to come to mind. Jim Chanos also mentioned in his presentation that the Chinese government had announced they would allow shorting shares in March. But obviously, their words cannot be taken for granted...

Here are interesting quotes from the IndexUniverse report:

Two of the biggest China-related ETFs split this difference, but their performance year-to-date has been remarkably different. The iShares FTSE/Xinhua China 25 Index Fund (NYSEArca: FXI) has dropped in line with the indexes, falling about 8 percent, while the iShares MSCI Hong Kong Index Fund (NYSEArca: EWH) has managed to stem losses to just 4.2 percent.

The big performance disparities are mainly the result of FXI’s dominant focus in financials. FXI is weighted a whopping 35 percent in China Construction Bank, Industrial and Commercial Bank of China, China Life Insurance, Bank of China and China Merchants Bank.
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Some of these alternative funds are beating the two dominant China ETFs by a hefty performance margin. For example, the PowerShares Golden Dragon Halter USX China ETF (NYSEArca: PGJ) is up 65.6 percent in the last year vs. returns of 45.13 percent and 54 percent for FXI and EWH, respectively. PGJ has less than 10% of its portfolio invested in financials, which could make it the go-to play for investors concerned about the health of the Chinese banking system.

PGJ’s top holdings include such volatile names as Yanzhou Coal Mining and the Aluminum Corp. of China. In the past year, Yanzhou has more than tripled in value, while Aluminum Corp. of China is up nearly 70 percent.

The SPDR S&P China (NYSEArca: GXC) is another ETF offering more diversification than FXI. With 150 holdings, it splits the difference on financials exposure between FXI and PGJ while capturing a wide spectrum of the Chinese economy. As a result, it is often able to pare its losses more in market downturns.

When analysts and strategists don't see any problem, it means that a potential major one is about to hit:

Once again, however, the big rise in property values doesn’t bother Asia analysts as much as it does Western ones. Jonathan Anderson, a strategist for UBS in Hong Kong, forecasts a temporary slowdown in the real estate sector, but no sounds of any bubble popping for some years to come.

“Using the historical experience from the Asian crisis countries … the ‘normal’ length of a bubble cycle with excessive leverage and overblown construction and real estate activity would be at least 4 to 5 years before things fell apart—by this metric it's still early days in China,” wrote Anderson in a recent research note.

And here are the perfect vehicles to achieve this:

Investors interested in playing the China real estate boom could do worse than the Claymore/AlphaShares China Real Estate ETF (NYSEArca: TAO), which provides broad-based exposure to Chinese real estate companies. TAO surged 60 percent last year on the backs of the real estate boom, and has more or less tracked the broader market year-to-date.


EWH also has a controversial focus in real estate, with roughly 25 percent of its portfolio weighted in real estate developers; Sun Hung Kai Properties is the fund’s largest holding, comprising around 8 percent of its portfolio. Of the broad-based funds, EWH is the only one with significant real estate exposure.

Other alternatives:

China investors have other toys to play with as well, including a number of funds from Claymore, such as the broad-based Claymore/AlphaShares China All-Cap ETF (NYSEArca: YAO), the small-cap-focused Claymore/AlphaShares China Small Cap Index ETF (NYSEArca: HAO) and the Claymore China Technology ETF (NYSEArca: CQQQ).

Indeed, Chinese technology has been a hot new corner of the market, with CQQQ going head-to-head with the Global X China Technology ETF (NYSEArca: CHIB). Chinese technology prices have held up better than most sectors in the recent sell-off, propelled by strong global demand for chip sets. In this sense, Lenovo and Semiconductor Manufacturing look like interesting holdings.

A China fund it may be worth staying clear of however is the Global X China Consumer Fund (Nasdaq: CHIQ).

It is true that with a booming import market and economy in general, CHIQ holdings such as sportswear maker Li Ning should be able to make moves. But CHIQ is also heavily invested in automobile manufacturers, such as Denway Motors and Hong Kong-listed Dong Feng Motors. Contrary to forecasts stateside, for many local market participants, the automobile sector is one of the few overblown areas of the Chinese economy, with no substantial upside.

“We expect more car brands to face downward price pressure because of a demand slowdown and a 26% year-on-year increase in supply, based on aggregate production plans, as well as … rising raw material prices,” wrote Kate Zhu, an automobile sector strategist for Morgan Stanley in Hong Kong, in a recent research note. “We do not expect industry margins to be maintained.”

China investors can also choose from the Global X China Energy ETF (NYSEArca: CHIE), the Global X China Financials ETF (NYSEArca: CHIX), the Global X China Industrials (NYSEArca: CHII) and the Global X China Materials ETF (NYSEArca: CHIM).

The wide variety of choices in the China market means investors control their own destiny. With a solid outlook for many parts of the Chinese economy, that may be a good thing indeed.

China ETF Choices
Fund	Ticker	Expense Ratio
Claymore/AlphaSharesChina All Cap	YAO	0.70
Claymore/AlphaSharesChina Small Cap	HAO	0.70
Claymore/AlphaSharesChina Real Estate	TAO	0.65
Claymore ChinaTechnology	CQQQ	0.70
Global X China Consumer	CHIQ	0.65
Global X China Energy	CHIE	0.65
Global X China Financials	CHIX	0.65
Global X China Industrials	CHII	0.65
Global X China Materials	CHIM	0.65
iShares FTSE/Xinhua China 25	FXI	0.73
iShares FTSE China (HK-Listed)	FCHI	0.72
iShares MSCI Hong Kong	EWH	0.55
PowerShares Golden Dragon Halter USX China	PGJ	0.60
SPDR S&P China	GXC	0.59