The world of ETFs have really opened up the retail trader to opportunities that are truly global.
Even 10 years ago, how confident could you be making a play on an individual equity in a Chinese company? For one, there were very few even listed on a U.S. exchange. Secondly, how confident could you be in the integrity of the reported earnings and such? Now, with the emergence of the ETF space, we can spread those risks over a portfolio of companies using an ETF such as iShares FTSE/Xinhua China 25 Index ETF (FXI). ” The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE China 25 Index (the Underlying Index). The Fund’s portfolio of sectors include Financials, Telecommunication, Oil & gas, Technology and Consumer goods.”
Go Short China
For a number of reasons, I want to take a short position in China over the next few months. From a technical basis, we are coming up to very significant resistance at 38.28 (top of the yearly Value Area) and a bit higher at 38.50 (top of the HVA). What’s even more compelling is all of the issues China is experiencing or may experience shortly is quite daunting.
Here are a few reasons for our bearish sentiment:
- Professor Gan Li at Texas A&M University estimates that there are a whopping 49 million vacant homes in China right now. As a percentage, this is twice the vacancy rate that the US housing market experienced at the peak of its recent bubble… suggesting that China has a rather painful housing collapse in store. This could be a brutal blow to the economy given that housing comprised 15% of GDP last year.
- They cannot feed their population. They don’t have enough fertile land to farm and the infrastructure needed to fix this problem is both time consuming and extremely capital intensive.
But here’s the kicker, Chief Economist Qian Keming of China’s Agriculture Ministry summed it up by telling the audience at the Third China International Agribusiness Forum:
“Fresh water resources are only 2100 cubic meters per capita, which is only 28% of the world’s average level.”
“The shortage of [water for agricultural irrigation] each year is about 30 billion cubic meters. China imported about 148.6 billion cubic meters of water in 2013, which was equivalent to 38% of China’s agricultural water.”
It’s hard to be bullish on an economy that can’t feed itself and cannot access enough water to make that situation better.
So, what can we do from a trading standpoint? First, we have to define our timeframe. I am not suggesting that China is going to collapse next week. But if we could structure an advantageous reward to risk scenario in FXI out to September or perhaps even December we could buy a put or a put vertical or conversely we could sell a call (warning! potential unlimited risk) or sell a call vertical.
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