China crisis threatens global financial markets

21. January. 2010
by: Peter Cooper (ArabianMoney)

Already faltering after a record rally from the depths of last March, global financial markets are facing an unwelcome headwind from China where the authorities have unexpectedly tightened bank lending, leading to fears that the local stock and housing asset bubble will now explode.

The Shanghai Composite Index dropped 2.9 per cent yesterday and the Hang Seng Index fell 1.9 per cent on news that regulators had told some Chinese banks to limit lending.

Oil price down
Any slowdown in demand from China will clearly be bad for global commodities, particularly oil and industrial commodities. Shares in mining groups are falling today on the news from China, and oil is off a buck.

Readers of ArabianMoney will not be terribly surprised to hear that Chinese stocks are falling. For the past month a number of articles have highlighted the danger in investment in the booming Chinese market which has become a classic bubble.

The King of Wall Street Shorts, Jim Chanos is actively promoting a shorting strategy for Chinese stocks and we have been looking at which ETFs offer the best shorting option for China.

The question is not if but when to short China. Short ETFs can lose a great deal of money while you wait for a market to crash, so you need to be pretty sure.

Shorting the sweet spot
One strategy is to deliberately miss the start of the downturn and attempt to capture just a part of the fall before it hits bottom. Even that is tricky as the Chinese authorities will surely reverse their action to some extent if a market correction becomes a rout.

But it ought to be possible to capture some of this market movement. However, it is really the longs who should watch out. For a correction in Chinese stocks will drag the entire global financial market down, and the extent of the recent rally will come under critical scrutiny.


So selling out of long positions and going into global short positions might also be very wise. Don’t get burnt by the Chinese dragon.