In recent years, China’s economic growth has slowed sharply, indicating that its era of rapid growth is coming to an end. This may provide investors with short-selling opportunities-a way to profit from falling stock prices.
There are several ways to do this, mainly by establishing long or short positions on exchange-traded funds (ETFs) that represent a broad range of Chinese stock markets or specific industrial sectors.
However, investors should be aware that short stocks are more risky than long stocks, because it usually requires a certain degree of market timing, which traditional long-term investments do not. It also involves limited upside but unlimited downside.
The short position of a long ETF
An effective but risky way to short the Chinese market is to short ETFs that are long Chinese stocks.
The FTSE China 25 Index ETF (FXI) is one of the more prominent funds that invest in large Chinese companies. Financial stocks account for 46% of the fund’s holdings, while communications, consumer discretionary and energy companies together account for about 37%. Financial companies are often the most vulnerable to economic downturns. The fund’s expense ratio is 0.74%.
For smaller companies, there is Invesco China Small-Cap ETF (formerly the Guggenheim Fund, the same code, HAO). Small-cap companies often exhibit high volatility, which makes them ideal short-selling targets. Approximately 60% of the fund is allocated to the industry, information technology, consumer discretionary and real estate industries. Its expense ratio is 0.80%.
Industry-specific long ETF
Investors can also short in specific industry funds that invest in Chinese companies.
Global X China Financials ETF (CHIX) invests almost entirely in Chinese financial services companies, accounting for more than 99% of its holdings. The market value of these companies is very large, which broadly reflects China’s insurance and banking businesses. The expense ratio is 0.65%.
Invesco (formerly Guggenheim) China Real Estate ETF (TAO) 93% invested in real estate companies and 5% invested in financial services companies. Real estate stocks include major companies such as China Overseas Land & Investment, CK Hutchison Holdings, and Hong Kong Land Holdings. The fund’s net expense ratio is 0.70%.
Investors can buy inverse funds that short Chinese stocks, rather than short long positions in Chinese ETFs. They can be leveraged, such as Direxion Daily China Bear 3x Shares (YANG), or unlevered, such as ProShares Short FTSE China 50 (YXI).
Direxion Daily China Bear 3x Shares seeks to achieve an inverse performance of 300% of the FTSE China 50 Index. In other words, if the China 50 Index falls by 5%, the fund should rise by 15%. The fund’s expense ratio is 1.08%.
ProShares short-selling the FTSE China 50 Index seeks performance that corresponds to the inverse (-1x) of the FTSE China 50 Index. Its short positions are highly concentrated in the financial sector (48% configuration), communications sector (21%) and energy (14%). Its net expense ratio is 0.95%.