Shopping For The China Bull

Includes: FXI, FXP, XPP
by: Macro Investor

A host of positive economic news came from China over the weekend which indicates a return of the China Bull. One piece of news in particular caught my eye. Xinhua reports that China Consumer Price Index grew to 2% from a 33-month low of 1.7% recorded in October.

What does increasing CPI in China mean for investors? To me, it is pointing to expansion of the economy, more so than other measures. China manufacturers will often overproduce just to keep the labor force employed. But rising consumer demand is not something that can be beneficially influenced.

Seems like Chinese experts agree.

...The government think tank, the Chinese Academy of Social Sciences (CASS) also predicted that the growth of the world's second largest economy would pick up in the next year.

In a blue paper issued by CASS last Wednesday, it expects the GDP to grow 8.2% and the CPI to reach 3% in 2013.

So, how to benefit from the nascent China Bull? As a big proponent of leveraged ETFs, my strategy is to short the ProShares UltraShort FTSE China 25 ETF (NYSEARCA:FXP) and go long by an equivalent amount on the ProShares Ultra FTSE China 25 ETF (NYSEARCA:XPP). These two ETFs both track the FTSE China 25 index which in turn can be bought through the iShares FTSE China 25 Index ETF (NYSEARCA:FXI).

Let's look at the relative performance of this strategy YTD, if one was to enter in it January 1, 2012.

  • FXI is up 11.5%.

  • XPP, 2x leveraged on the underlying index of FXI, is up 26.5%.

  • FXP, 2x leveraged short on the underlying index of FXI, is down 36.7%.

The paired trade as above would therefore yield 63.2%, a synthetic yield of about 6x of FXI.

Warning: This is a highly leveraged trade. If FXI were to fall, it would wipe the investor out in a short amount of time. I am only using less than 5% of my total portfolio to enter this trade, and I am comfortable with this level of exposure.

Disclosure: I am long FXI, XPP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long FXI, XPP and short FXP.

Disclaimer: This is not meant as investment advice. This is purely my personal strategy and involves a huge amount of risk. While I am comfortable with it, everyone should decide for themselves whether to engage in this strategy after talking to their financial advisor.