With the increased volatility in the Chinese stock market, several investors are looking to profit from the downward momentum of many Chinese stocks.
In this article we will go over the different approaches to shorting the Chinese stock market, and what could be the best options for you.
Chinese stocks continue trading lower
Chinese stocks have been one of the worst-performing stocks over the last year or so. The increased government scrutiny and strict regulatory action, that started with Didi’s removal from app stores are unlikely to slow down any time soon.
The Hang Seng just hit its 5-year low, and even the Chinese trading in US markets seem bound to continue dropping. Given the increased scrutiny and possible delisting, it seems like there is no end in sight.
The Chinese real estate bubble also seems to have popped, with Evergrande being the poster child. Additionally, the economic projections for the Chinese economy are now grimmer.
Therefore, it makes sense that many investors are looking to profit from the collapse of Chinese stocks. Let’s look at some of the ways you can do it, as well as some key questions regarding this topic.
Is there short selling in China?
Yes, short selling is allowed in China, and you can short Chinese stocks if you can trade the Hong Kong or Chinese Market. However, the size of the market is much smaller when compared with the US and Europe. Therefore, it is not as easy to get brokers to lend you shares to short.
Can you short China stocks?
Yes, you can short Chinese stocks. There are a number of ways of doing so. You can either short individual Chinese stocks, trade on US markets, Hong Kong, or even China if you can trade there. There is also an alternative, which is to short Chinese stock ETF. Finally, you could also invest in an inverse ETF, which gives investors short exposure to Chinese stocks.
What is the best way to short Chinese stocks?
It depends on your portfolio and your individual goals. Some people find it easier to short Chinese ETFs, although it might be more profitable to short individual stocks. The reason is that you can pick the worst Chinese stocks to short, and your returns could be much higher.
You could also buy an inverse ETF, that can be leveraged, and offer you even more short exposure to Chinese equities. However, investors should be aware that inverse ETFs are better used in the short-term, due to the costs of running this type of fund.
What is the easiest way to short the Chinese market?
The easiest way to short the Chinese market is to invest in a Chinese inverse ETF. This will allow you to profit in case Chinese stocks continue to drop, and you may also choose the amount of leverage you want.
The reason that inverse Chinese ETFs are the easiest way, is that you can only lose your initial investment. As you know, when investors short stocks or an ETF, your potential losses could be unlimited. Inverse ETFs, are easy to trade, and allow you to control your risk exposure, in case Chinese stocks rally.
3 Ways to short the Chinese stock market
As we have mentioned above there are 3 main ways of shorting the Chinese market. Each one has its advantages and disadvantages. Let’s analyze each one individually:
- Shorting individual Chinese stocks
- Shorting Long Chinese ETFs
- Investing in inverse Chinese ETFs
Shorting individual Chinese stocks
For investors that are willing to take the time to individually research companies and pick the bad apples, this is certainly the best way to short the Chinese stock market. You can conduct deep fundamental analysis, and determine what are the worst companies and the most attractive shorts.
The main advantage is that if the Chinese stock market continues to fall, the worst stocks are expected to fall even further. By picking and shorting the worst individual Chinese stocks you are guaranteeing that your returns would be higher.
There are also obvious disadvantages. One of them is that it will take a considerable amount of time to research each company individually. Additionally, the risk of shorting individual stocks is unlimited, since the stock could go higher, and force you to cover your short position at a significant loss.
Shorting Long Chinese ETFs
By picking a long Chinese ETF to short, investors are essentially shorting a basket of Chinese stocks. One of the clear advantages is that it takes a lot less time to choose these ETFs. You can even choose them according to the industry, or if they are growth or value stocks.
The clear disadvantage is that if the Chinese stock market declines, this will most likely have an average return. Additionally, there is also the risk of unlimited losses, in case the Chinese stock market starts to rally.
Here are some of the largest Chinese ETFs:
- iShares MSCI China ETF (MCHI)
- KraneShares CSI China Internet ETF (KWEB)
- iShares China Large-Cap ETF (FXI)
- Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)
- SPDR S&P China ETF (GXC)
- Invesco China Technology ETF (CQQQ)
- iShares MSCI China A ETF (CNYA)
- WisdomTree China ex-State-Owned Enterprises Fund (CXSE)
- KraneShares Bosera MSCI China A 50 Connect Index ETF (KBA)
- Direxion Daily FTSE China Bull 3X Shares (YINN)
Finally, if you want to leverage your short bets on Chinese stocks, you can also short an ETF with leveraged long exposure to the Chinese stock market, like the Direxion Daily FTSE China Bull 3X Shares (YINN).
Investing in inverse Chinese ETFs
Inverse Chinese ETFs will generate the opposite return of the Chinese market. One of the advantages of using them is that some use leverage. This way you can protect against unlimited losses while having short leveraged exposure to Chinese equities.
It should be mentioned that some of these China bear ETFs have considerable fees, and due to their structure, they are not the best solution if you want to short the Chinese stock market over the long term.
Here are the largest inverse Chinese ETFs:
- Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD)
- Direxion Daily FTSE China Bear 3X Shares (YANG)
- ProShares UltraShort FTSE China 50 (FXP)
- ProShares Short FTSE China 50 (YXI)
How to short the Chinese housing market?
There are only two ways of shorting the Chinese housing market. Either you short Chinese real estate developer stocks, or you can short a Chinese real estate ETF like Global X MSCI China Real Estate (CHIR).
You can choose between the two options, depending on the amount of time you want to take in order to research real estate stocks in China, and the amount of risk you want to take.
It is nearly impossible to tell if the Chinese stock market will continue to further decline over the next year or the next decade. However, investors looking to profit from the decline can use a variety of methods to their advantage.
When shorting stocks, and ETFs, investors should carefully analyze the risk and possible rewards. Be aware of this in order to protect your portfolio against unexpected events.
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