Tuesday July 31, 2012
by Nicholas Vardy, editor Global Guru
A handful of high-profile hedge fund managers, including Jim Chanos in the US and Hugh Hendry in the UK, are betting both against China's economy and Chinese real estate. Here's how you can do the same.
I've been a bear on China for a long time. And I believe history will show that Chinese economic statistics -- especially concerning GDP and inflation -- are unreliable.
You can argue the numbers until the cows come home. But the bottom line is this: the numbers don't add up and it's worse than what the Chinese government admits. The Chinese economy may face a "lost decade" like the United States or Japan for two reasons.
First, with investment accounting for about 50% of GDP growth in China, no economy in history has experienced growth that has been this unbalanced and distorted. Much of this investment has been financed by China's mostly government-owned banks.
An enormous amount of still unseen debt and bad investments will take a long time to work through the economy. And that's bad news for the Chinese banking system.
Second, China is suffering from a real estate bubble; real estate construction, as a share of China's GDP, is nearly double what it was for the U.S. economy in 2005, right before the housing bubble burst.
As a result of these factors, the Chinese economy faces some tough times ahead. But you can benefit from this.
First, bet against the Chinese stock market and the poorly run state-owned enterprises that make up the bulk of the index. The best way to do this is through ProShares Trust Short FTSE/Xinhua China (YXI).
This ETF rises as the Chinese market falls. With a 52.70% weighting in Chinese financials, this position should soar as banks start to write off bad loans in the coming years.
Second, tumbling Chinese GDP growth is hitting global demand for commodities hard. That's bad news for former investment darlings, such as commodities giants like Australia's BHP Billiton (BHP) and Brazil's Vale (VALE). These are highly liquid stocks that you should be able to short in any U.S. brokerage account.
Learn more about this financial newsletter at Nicholas Vardy's Global Guru.