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The Chinese stock market has been crashing. Even though it is down by some 30%, there may be more damage to come. Do you short the Chinese market, or buy since there is already blood in the streets?
I’ll tell you one thing for certain: Do not buy Chinese stocks. The reason can be summed up in an anecdote that a good friend shared with me. He’s a movie producer who has done some work in China. He tells me that the theater owners there will skim money off the box-office and concessions for themselves, yet then report better-than-expected results to the Chinese government … because the government expects them to.
If this is going on in the movie business, it may be happening in every industry for all we know. I don’t want any part of it, and neither should you. In any event, the skyrocketing growth days for China are over.
This is the same reason I advise people to generally avoid country ETFs. There’s just too much volatility and we never really know what each culture does with respect to corruption and proper reporting. So if you are going to invest internationally, you have to hand the investment over to managers with experience, and stick to widely-diversified ETFs and mutual funds.
China Choices
So if you don’t buy Chinese stocks in the midst of China’s stock market crash, do you short them? That depends on your risk tolerance and what you think about the Chinese market moving forward. There aren’t that many choices, however.
For the conservative play, you can do what I did, and buy the ProShares Short FTSE China 50 (NYSEArca: YXI). This index shorts the 50 largest and most liquid Chinese stocks that are listed on the Hong Kong Exchange.
I chose this ETF because it’s simple – 50 stocks that a lot of investors own. While it isn’t as likely to fall as much as other stocks in an ongoing crash because large-cap stocks are generally considered safer havens, it should also have the least volatility of all the possible choices. I just don’t want to lose 20% in a single day, which could happen with other choices.
A middle-of-the-road choice would be the ProShares UltraShort FTSE China 50 (NYSEArca: FXP). This is exactly the same as the previous selection, however, the fund uses derivatives to offer twice the inverse of the top 50 stocks. This leverage thus aims to double the downward performance of the index.
Getting More Aggressive
It’s a more aggressive bet that Chinese stocks will continue to fall, but there are even more aggressive choice.
Case in point: the next step up – Direxion Daily CSI 300 China A Share 1X Shares (NYSEArca: CHAD). This is just like the other choices, except it looks to mirror the inverse of the 300 largest and most liquid Chinese stocks. You might expect an ETF that has more holdings to have less volatility. However, China isn’t like the U.S. exchange. Once we get into 300 stocks, we are getting into some specialized and smaller companies that are more volatile.
So on a day like July 9, where the YXI ETF fell 4.2%, the CHAD fell 21%. It’s not for me, but other aggressive investors may like it.
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