Post-Olympics Bubble: Shorting China With ProShares

Jan. 9.08 | About: ProShares UltraShort (FXP)

"212 days to go," declares Nini, the official symbol of the Beijing 2008 Olympic games, which will take place in August 2008. August 2008 is also seen by many investors as the date when the Chinese stock exchanges bubble will finally burst. There are many reason behind this sentiment, the most important one being historical: almost every country that hosted the Olympic games has experienced an economic recession right after the games. This phenomenon has received the term "Post-Olympics Bubble".

And China knows it; when we "googled" the term, we got many scholarly commentaries that were published ion English-translated Chinese newspaper websites. According to them, "China says 'no' to post-Olympic bubble". But the problem is that the Chinese stock exchanges are currently much hotter than China's economic growth. Shanghai's stock exchange is described in the Economist's "The World in 2008" in gloomy colors: government control in every critical issue of traded companies; directed disinformation of investors; huge earnings multiples; distorted accounting standards; and short-sale illegalization. The most severe problem, according to the magazine, is that the pricing of many companies is determined by the small portion of stocks that are publicly traded. As a result, the mood change of a very small group of people may lead to a crash.

We are not able to invest directly in Chinese indices (A-type stocks are limited for Chinese investors only), but in B and H stocks based indices, only. These stocks are also enjoying the momentum; Hong Kong's Xinhua 25 index, for instance, has gained 100% in return since January 2007 (as of November 2007).

This index can be shorted by a new PowerShares ETF, which gains twice the inverse return of the Xinhua 25: UltraShort FTSE/Xinhua China 25 (NYSEARCA:FXP). For example, if the Xinhua 25 index is down 2%, FXP will go up in 4%.This ETF is also adequate for investors seeking hedges against short-term crashes.

Disclosure: none