Double Down On This China Fall

Chinese stocks have been hit pretty hard lately, no matter where the stocks are listed, US, Hong Kong, or mainland China. To get a sense of how bad things have been recently, take a look at these numbers:

• Hang Seng Index (^HSI) is currently at 27,588, down more than 4,000 points from the peak of 31,638 reached on October 30th. That’s a loss of more than 12%.
• Shanghai Composite Index (^SSEC) dropped 973 points from the record high of 6,092 on October 16th, enough for a decline of 16% in less than a month.
• iShares FTSE/Xinhua China 25 Index (FXI) plunged nearly 17% since it reached $218.52 on October 31st.

Of course, the crisis in the US financial markets has ignited the sell-off around the world, the stock markets in Hong Kong and China were hit particularly hard, compared to the 7+% loss of the Dow and the S&P from their respective peaks on October 9th. One of the reasons contributed to the steep decline of Chinese stocks is that China decided to postpone indefinitely the plan to let its citizens to invest directly in stocks listed on Hong Kong Stock Exchange, fearing that the flood of money could further inflate the Hang Seng index, which has been pushed higher and higher since such plan was announced in the summer.

If you are an investor with a significant portion in Chinese stocks and want to protect your investments, or if you are one of those who believe that the Chinese stock market is a bubble waiting to burst (I am neither), you may profit from it if that theory turns out to be true.

Last week, ProShares launched a ETF that allows investors to make money if Chinese stocks tumble as many have anticipated. The new ETF, ProShares UltraShort FTSE/Xinhua China 25 (FXP), seeks daily investment results that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. According to the fund’s prospectus (PDF):

If UltraShort FTSE/Xinhua China 25 ProShares is successful in meeting its objective, its value (before fees and expenses) should gain approximately twice as much, on a percentage basis, as any decrease in the FTSE/Xinhua China 25 Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the index rises on a given day.

The fund started trading on November 8th and has an expense ratio of 0.90%.

Sounds like a good idea to make some quick money? Maybe... in the short term.

Comments

[johnthebear]

What is the point of the story? This is really a short sighted way to play the game on FXI. "The new ETF, ProShares UltraShort FTSE/Xinhua China 25 (FXP), seeks daily investment results that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index."

Why not buy puts on FXI? The bubble is so big, it seems likely that it could drop back to 60 while trying to find a stable bottom by January 2008. When you take a close look at the chart, puts are very cheap and offer huge multiples of potential. profit as FXI drops toward 100.

I own puts for Jan 08 and jan 2009 at 60 and 70 strike price for what it is worth. Yes, I have a BIAS, but one that is based on close market observation.

[johnthebear]

I was wrong about puts. I still have Jan 09 puts, but have lost most of their value. Could still gain if the FXI drops below 100.

I would have been better off owning FXP which has no time limit and pays off double when FXI goes down. After starting to use FXP, I have been able to use it effectively for short term trading.

Thanks for your article.