The great fall of China: Hedge Funds divided by region
Investors can only agree to disagree regarding the near term prospects for Chinese shares. We are able to show that the divergence of opinion reflects where the investor is based. We also see that short sellers are challenging the perceived wisdom that the Chinese consumer is the key investment theme. Stocks of interest today are: Agile Property (3383), Chongqing Iron & Steel (1053), China Agritech (CAGC), Deer consumer Products (DCPD), Li Ning (2331) and two Chinese market related ETFs (2823 and 2829).
Those managing money in the US, who prefer to invest in USD, are more skeptical about the fortunes of China than those firms who carry out short sales on the Hang Seng. If past experience of US investors shorting European banks is anything to go by, the further removed fund managers are from the issues, the easier it is to achieve 20:20 objectivity and the correct outcome. This could mean that the US based China bears could prevail.
The tale of two cities is told by the graph showing declining short selling in HK listed H shares, while short selling in the NASDAQ listed China companies is increasing. The Economist (http://econ.st/dFGbOw) used Data Explorers data to establish which regions are short selling China and why. The funds in New York seem to be anticipating a China slow down as opposed to the Hedge Funds in Hong Kong.
Hugh Hendry is the latest high profile (and extremely entertaining, see http://bit.ly/Fn4sA) Fund Manager to express a doomsday scenario surrounding China. Bloomberg Markets reported on his theory that falling property and stock prices will be made even worse as China’s export market slows down. He is said to believe that GDP growth is not filtering down the chain to create domestic wealth creation. Is China at risk of becoming like America was in 2007, when the top 1% of earners received 18% of the total wealth?
This is very interesting since there are a number of companies focused on the Chinese consumer who are foreseen to be tripping up according to short selling data. We have already covered local sportswear firm Li Ning. The FT’s Lex column also discussed its plight recently (http://bit.ly/hLu0Fw). 10% of the total shares are outstanding on loan, which is just off its one year high. Deer Consumer Products sells small home and kitchen electrical appliances like blenders to Chinese consumers. An enormous 20% of this firm’s shares are short sold. A theme could be developing whereby Chinese consumers with sizeable disposable income to buy appliances and sportswear fashion are migrating towards international rather than local brands.
A Real Estate bubble is the commonly held view by the likes of Jim Chanos and Hugh Hendry. As such, it is no surprise to see three of the top 10 biggest short positions in China’s H shares being such firms – Agile Property, Sino Ocean Land and Shui On Land. However, it is worth pointing out that investors have covered their shorts in Agile Property from 6.5% down to 5% since November. With that said, it remains a substantial short position. This pattern is mirrored in Sino Ocean and Shui On Land. It seems that Hong Kong investors are wary of potential further Government intervention to prevent a commercial property collapse.
Chongqing Iron & Steel shows strong negative sentiment. As an aside, Chongqing is a booming city in the interior of China. A YouTube comment under Hendry’s video tells me that officials want this city to be the Chicago of China, meaning a non-coastal location is set to benefit from the current economic expansion as the American city did so successfully 100 years ago. But, its distance from the sea means that its success still hinges upon domestic demand. If this slows down, so the short sellers argument goes, this threatens a company which benefits from the region’s growth. Couple this theme with the rising steel price, and one can understand why the company has seen short interest increase to 5% of its total shares, up from 2.5% in November. Another company to mention is US listed China Agritech which shows that even agriculture is prone to some negative sentiment. 10% of its shares are on loan, with a big spike observed at the start of January.
Finally, what of the ETFs? The most shorted China related ETF is the iShares FTSE A50 which shows short interest is at a six month high of 6.5%. This will be partly hedging but must, in some way, reflect greater recent nervousness about the prospects for China’s domestically listed shares. The other observation is one or two short positions in the iShares A Share Financials ETF on the back of recent regulation forcing greater capital requirements.
