Tom Orlik wrote on Wall Street Journal that “It’s too soon to start betting on the collapse of China“.
Sorry. It’s not too soon, but too late.
“Collapse” is a very strong word. Even though I am very bearish on China vis-à-vis the consensus, I hesitate to say that I am expecting a “collapse”. For the Chinese economy, 5% growth rate would be bad enough for most people to say that it is a “hard landing”, and negative growth has been unheard of since 1970s. Fair enough, I did suggest that negative growth will not be impossible, and perhaps that’s a “collapse” as we know it, but I am not sure if I really want to assign a big probability there.
While I can accept that a “collapse” is probably an exaggeration of the risks (again, not that it is impossible), I am still pretty amazed by what the consensus is saying about the Chinese economy. The problems I saw since early this year started to surface to everyone’s consciousness only in the recent weeks, which prompted some serious sell-off of Chinese related shares in the Hong Kong stock market in particular. But the consensus is still telling me that China is fine, with very few exception within the sell-side research community (Dong Tao of Credit Suisse, for instance, is more bearish than his counterparts). Still, even the most bearish one isn’t expecting hard landing or something, yet the stock markets have been doing rather miserably.
After this almost-year-long underperformance of Chinese equities in Hong Kong vis-à-vis the US, for example, the bearish bets we bears have been making for a year or so have been paying off very well even though the Chinese economy has not “collapsed” yet. At the beginning of this year, shorting China was among the most contentious investment ideas. Now, it is no longer as contentious as it was at the beginning of the year. When the proposition loses a certain degree of contentious nature, it means that those bets are no longer as cheap as they were 10 months ago. And don’t forget that even the most epic bear market would surprise investors with occasional huge rallies from time to time. Being long in China is risky, but getting into the short now might be just as risky.
Of course, if you are now very convinced that China will “collapse”, whatever it means, there will certainly be downside. But be aware that you have already lost the best time window to make bearish bets. Sorry, but yes, you are coming in a little bit too late.
This article originally appeared here: Want to Short China Now? It’s Not Too Soon, But Too Late
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