3 Ways to Play a China Crash

Over the past 20 years, the Chinese economy has defied gravity, growing consistently at double-digit rates.

 But recently, the seemingly invincible country has been become a bit shaky, and high-profile economist Nouriel Roubini, has indicated there is a “meaningful probability” of a hard landing in China. 

Roubini believes that the country has artificially inflated growth through huge investments.  In fact, these expenditures represent roughly half of the country’s gross domestic product.  The result has been bubbles in real estate and lending. 

And when they pop, the consequences are likely to be severe – especially for the global economy.  He thinks a crash may occur in 2013.

But Roubini isn’t the only one with concerns.  Famed short-seller Jim Chanos, who operates the Kynikos Associates hedge fund, is also negative on China.  Over the past year, he has been taking aggressive short positions.  He also thinks that a China crash will result in a big drop in commodities prices.  After all, the country is a huge buyer of iron and copper. 

So how can investors play this?  Let’s take a look at some ideas:

Short Chinese IPOs:  Until a month ago, just about any Chinese public offering was a sure-fire way to get nice returns.  But there has since been an abrupt correction.

Despite this, valuations are still at nose-bleed levels and there should be short-sale opportunities.  Take a look at Renren (Nasdaq:RENN). It’s known as the “Facebook of China,” but it certainly doesn’t have the same type of scale or financials.  First of all, the user base is 117 million, which compares to Facebook’s 700 million.  What’s more, Renren’s revenue was $76 million last year, compared to Facebook’s roughly $2 billion.

Renren is a fairly small operator.  Yet the valuation is a hefty $3.3 billion.

ProShares Short FTSE China 25 (NYSE:YXI):  This exchange-traded fund essentially shorts a basket of 25 Chinese companies, such as China Construction Bank, China Mobile (NYSE:CHL), Industrial and Commercial Bank of China and CNOOC (NYSE:CEO).

The main industry concentrations include financials, energy, communications and industrials.  No doubt, these categories will likely see some big problems if there is a hard landing in China. 

SPDR Gold Shares (NYSE:GLD):  A China implosion would certainly unsettle global markets.  And this means there will likely be a flight to safe havens.  Thus, expect an increase in the price of gold.

This gold-focused ETF physically holds gold and is a good way to track the price movements.  Also, the expense ratio is a fairly low 0.4%.

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.”  You can find him at Twitter account @ttaulli.  He does not own a position in any of the stocks named here.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2011/06/3-ways-to-play-a-china-crash/.

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