Do You Know What You Don’t Know About China?

Over two weeks ago, I wrote a post suggesting going long US Municipal Bonds and China , as a “knife catching” trade . Those trades haven’t fared too poorly since. I recently listened to a fund manager who is (arguably) the most bearish manager out there (on China). I won’t pretend that I’m suddenly a China expert, just because I sat through a very detailed, and well-researched presentation on China. In fact, you should assume I’m the patsy, or closer to being the patsy in the room rather than the proverbial  “smartest guy in the room”. That said, all prospective investors in China should ask themselves the following questions:

  • Do you know what’s going on in China?
  • Specifically, do you know how China’s banking system works?
  • Do you know how large China’s banking system is? In absolute terms? In relative terms?
  • Do you know what a ‘deposit’ in China is? Do you know how comparable said deposits are compared to a US bank’s deposits?
  • Do you know why short term rates skyrocketed recently?
  • As far as vacant properties go, if Ordos is NOT the exception, and actually indicative of what’s going in more populated centers within China… what would you do?

I currently believe longer duration players (specifically over next 2 years’ time) should stay away from going long China until there has been some cleansing in its banking system and/or some drastic Renminbi actions. This doesn’t mean there is no room for violent counter-trends to the upside (which should be taken as a gift to SELL; we are in one right now, so I think). But being too cute can backfire.

Thesis: China’s banks will have to take some pain, or its currency must take a hit, before going “all in” long China as a “buy and hold” makes sense. That is the set of events I’m watching. I don’t think there there is any other way around China’s banking situation. Steer clear of China and related long plays (for longer duration purposes; speculators, do as you wish!) until either happens.

For the more speculatively inclined: shorting is always and everywhere a precarious undertaking. That said, there is more than one way to skin this China cat… in equities, FX, and commodities land(s).


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