Looking to Go Short on China? Here's How

China's economic growth has slowed sharply in recent years, suggesting that its era of rapid growth is ending. That could present investors with shorting opportunities—a way of profiting from falling stock prices.

There are several ways to do this, mainly by taking long or short positions on exchange-traded funds (ETFs) that represent either the broad Chinese stock market or specific industrial sectors.

Investors should be aware, though, that shorting stocks is a riskier proposition than staying long, because it generally requires a degree of market timing that conventional long-term investments don't. It also involves limited upside but unlimited downside.

Key Takeaways

  • China's economy has seen a bit of disruption following the COVI19 pandemic and its attempts to keep the virus out of the country.
  • In addition, the Chinese government has recently cracked down on the international expansion of its tech sector.
  • Scandals involving real estate developers such as the Evergrande default have also rattled investors' nerves.
  • Those looking to short the Chinese market can look to ETFs to do so.

Short Positions in Long ETFs

An effective, though risky, way to short the China market is to take short positions in ETFs that are long on Chinese stocks.

The FTSE China 25 Index ETF (FXI), is one of the more prominent funds investing in large-cap Chinese companies. As of February 2022, financials and consumer stocks represent about one-third each of the fund's holdings, while communications and information technology make up another 25%. Financial companies tend to be the most exposed to economic downturns. The fund has a 0.74% expense ratio.

Sector-Specific Long ETFs

Investors can also take short positions in sector-specific funds that invest in Chinese firms.

The Global X China Financials ETF (CHIX) invests almost exclusively in Chinese financial-services companies, which account for more than 99% of its holdings. The companies have very large market capitalization, broadly reflecting China's insurance and banking businesses. The expense ratio is 0.65%.

Inverse ETFs

Instead of taking short positions in long China ETFs, investors can buy inverse funds that short Chinese equities. They can be leveraged, such as Direxion Daily China Bear 3x Shares (YANG), or unleveraged, such as ProShares Short FTSE China 50 (YXI).

The Direxion Daily China Bear 3x Shares seeks results that are 300% of the inverse performance of the FTSE China 50 Index. That is, if the China 50 Index falls 5%, the fund should rise 15%. The fund has an expense ratio of 1.07%.

ProShares Short FTSE China 50 seeks performance that corresponds to the inverse (-1x) of the FTSE China 50 Index. It takes short positions with a high concentration on the financial sector (a 46% allocation) and communications sector (18%). It has a net expense ratio of 0.95%.

Article Sources
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  1. The World Bank. "GDP Growth (Annual %) - China."

  2. iShares. "iShares China Large-Cap ETF."

  3. ETF.com. "CHIX."

  4. Direxion. "Yinn Yang."

  5. ProShares. "ProShares Short FTSE China 50," Pages 1-2.

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