Why It's a Great Time to Short Chinese Real Estate

| About: Guggenheim China (TAO)

The easiest way for Westerners to buy a stake in Chinese real estate has been through a Hong Kong real estate developer ETF called TAO. In its brief history it has gone from $26.99 at its initial offering in December 2007 down to $7.72 in November 2008. Since that time it has clawed and scrounged its way back up to $20 a share.

Up until now an investor has been virtually unable to short shares of TAO. However, just recently the name of the fund has changed from Claymore/AlphaShares China Real Estate to Guggenheim China Real Estate ETF. The shares have become more liquid and soon one should be able to buy puts and calls on the options exchange (which one could not do before.)

TAO has a dividend yield of 3%, which is absolutely paultry and an indication that the stock is way overvalued especially since even if one doesn’t conclude Chinese real estate is a bubble, one must admit that the cycle is at its apogee. So 3% signals the sector has hit its peak.

Many of the stocks that make up TAO are Hong Kong developers. The Hong Kong market is being inflated by mainland demand and should fall off once things cool down there. Furthermore, Hong Kong real estate prices are unjustifiably high because Hong Kong is losing its relevance as a commercial middle man for Chinese goods and financial transactions.

Countries eventually have recessions. China delayed theirs with a stimulus 26% the size of their GDP (the US stimulus was only 4% of GDP), but the day of reckoning will come when mania turns to terror as people cannot make their mortgage payments and need to sell to raise quick cash.

If you have Chinese investments it would be worth considering buying options or shorting some Chinese real estate or banking stocks to hedge your position. Once a pull back in the market comes it will be sudden. The recent Chinese central bank rate hike might be enough to scare the market and lead to declines in asset prices.

I found this Bloomberg article to be the most up to date, fact filled account of Chinese housing that I was able to find.

Disclosure: I am currently short TAO.