Why it’s time to short Chinese stocks

Monday, 7 September 2019
Adelaide, Australia
By Bernd Struben

  • A very tough deal
  • Your latest trading tips
  • Trading Plan in Action

Try as I might, I can’t recall what I was doing in December 1969. The best I can do is guess.

Having just turned one year old, I probably spent a fair bit of time sleeping. When I wasn’t crying, eating or crawling around putting things in my mouth, that is.

I imagine there was plenty of sweating going on as well. We didn’t have aircon. And my family — mum, dad, sis and me — shared a single fan…until it broke.

We were living in a plantation house outside of Paramaribo. That’s the capital of Suriname. And it’s just a stone’s throw from the equator.

At the time, Suriname was still a Dutch colony. It wouldn’t gain its independence for six more years, in 1975.

My dad was working as an economist for the Dutch government. It was either that or serve a stint in the Netherlands’ military. This was mandatory for all male citizens (equal rights, anyone?) until 1996.

It would be another year before my dad accepted a job with the World Bank, which saw us move to Virginia, just outside Washington DC.

So in December 1969, I would have had no clue that the US unemployment rate stood at an admirably low 3.5%. No clue that it would only trend higher from there. And no clue it would take almost my entire lifetime (to date) to get back to that low.

But that’s exactly what happened.

As the AFR notes, ‘…on Friday, the US non-farm payrolls report showed unemployment had dropped from 3.7 per cent to 3.5 per cent, its lowest level since December 1969.

For comparisons sake, Australia’s unemployment rate currently stands at 5.3%. Most pundits quote 4.5% as ‘full employment’ Down Under.

Now, I won’t get into how governments around the world fudge their employment figures. That’s because they’ve always fudged them. Meaning the 50-year low in US unemployment figures remains meaningful. Very meaningful.

Importantly, for you as an investor, the good news came on the tail of two sets of bad data released last week. Namely the US manufacturing index showed a decline and the all-important services index showed slowing growth.

Why is that important?

Because, despite the half-century low in unemployment, the US Fed still has reasons to cut interest rates when the committee meets later this month.

Now, traders did cut the odds of the Fed doing so in October from over 90% to around 70% following the release of the US jobs data. But the odds of at least one more 0.25% cut from the world’s most watched central bank in 2019 remain almost assured.

That, in turn, will entice other central banks to follow suit. RBA governor Philip Lowe has already flagged the likelihood of another reduction in the Aussie cash rate. One which would bring our official interest rate to a razor thin 0.5%.

What we’re seeing here is central banks proactively racing to stimulate economies that are not in recession. The world’s biggest economy posted its strongest employment levels in 50 years.

Even last week’s ‘alarming’ data out of the US, which saw global markets shed tens of billions of dollars, was a bit of a storm in a teacup. The manufacturing data, admittedly poor, is only at a 10-year low. While growth in the services figure was at a mere three-year trough.

No matter. Stimulate away.

And with wages flat and interest rates near zero, where is much of that cheap money going to go?

Stocks, of course.

Though many Chinese companies may be left out of the next rally.

More, after the markets…


Over the weekend, the Dow Jones Industrial Average closed up 372.68 points, or 1.42%.

The S&P 500 closed up 41.38 points, or 1.42%.

In Europe the Euro Stoxx 50 index closed up 29.34 points, or 0.86%. Meanwhile, the FTSE 100 gained 1.10% and Germany’s DAX closed up 87.56 points, or 0.73%.

In Asian markets Japan’s Nikkei 225 is down 48.98 points, or 0.23%. China’s CSI 300 is closed today for National Day 7 holiday. China’s markets reopen tomorrow.

In Australia, the S&P/ASX 200 is up 44.32 points, or 0.68%.

West Texas Intermediate crude oil is US$52.74 per barrel. Brent crude is US$58.25 per barrel.

Turning to gold, the yellow metal is trading for US$1,507.40 (AU$2,229.22) per troy ounce. Silver is US$17.58 (AU$26.00) per troy ounce.

One bitcoin is worth US$7,798.82.

The Aussie dollar is worth 67.62 US cents.

A very tough deal

Rightly or wrongly, Donald Trump was quick to take credit for the strong jobs report. Here’s part of his tweet over the weekend, ‘Breaking News: Unemployment Rate, at 3.5%, drops to a 50 YEAR LOW.’

He also used the news to disparage the Democrats ongoing impeachment inquiry.

While Trump is celebrating, this has got to be terrible news for Xi Jinping. And during the tail end of China’s week long 70-year birthday bash, no less.

All this as Hong Kong protesters dig in, seemingly intent on a showdown with Chinese troops…or capitulation from the Communist government on greater democratic rights. I’ll let you decide which outcome is more likely.

Adding a dash of salt to Xi’s wounds, Bloomberg reports that the US merchandise trade deficit with China shrank last month. US exports came in at a five-month high.

This is the backdrop trade negotiators face as they prepare to sit down for a new round of high level talks later this week.

And with China backing off its commitments to reform industrial policy and government subsidies for its state owned enterprises, any meaningful new deal looks elusive. At best.

Now many mainstream analysts appear to believe that the impeachment issue could lessen Trump’s resolve.

From Bloomberg:

China’s leadership “are interpreting the impeachment discussion as a weakening of Trump’s position, or certainly a distraction,” said Jude Blanchette, an expert on China’s elite politics at the Center for Strategic and International Studies.

“Their calculation is that Trump needs a win” and is willing to make compromises on substance as a result, he said.

With all due respect to Jude and his expertise in elite Chinese politics, I believe he understands very little about Trump.

Trump does need a win. But he’s not going to accept any deal his opponents can use to paint him as weak. Speaking to reporters on Friday, Trump said, ‘[W]hat we’re doing is we’re negotiating a very tough deal. If the deal is not going to be 100% for us, then we’re not going to make it.

The mistake politicians and analysts across the globe have made since Trump’s surprise election is to dismiss much of his bluster as, well, bluster. But the truth is Trump digs in behind his every utterance. From pursuing his great southern wall, to building a US space force, to levelling the global trade playing field…he’s going for 100%…or nothing.

Which tells me that the upcoming round of trade negotiations will almost certainly come to nothing. When that news hits, it will likely see a fresh round of selling in global stock markets…until the Fed steps back in.

But I believe the worst pain will be among Chinese stocks.

China’s CSI 300 is still up 10.9% over the past 12 months. That’s the best returns of any of the major global indices we follow here. But if China doesn’t bend soon, the damage from an escalating trade war could turn that top performance on its head. And the Chinese economy and its booming factory output may never recover their dominance.

From Bloomberg:

Thirty years ago, Taiwanese tech entrepreneurs started moving factories to the mainland, kicking off a global economic transformation that’s made China the world’s top manufacturer of electronics. Today, four Taiwan-based companies—Foxconn Technology Group, Inventec, Quanta Computer, and Compal—together account for some 40% of exports from China to the U.S. of computers, phones, and related items. But faced with growing trade tensions and U.S. tariffs, the leaders of those companies are reconsidering their commitment to China. Although any pivot away from the country is just starting, factories that leave won’t come back anytime soon.

The takeaway?

Thanks to continued central bank manipulation, more than improving earnings, I believe US and Aussie stocks will see a decently strong ending to 2019.

But I believe the trade war and an increasingly likely ugly blowout in Hong Kong could see Chinese linked stocks take a big hit.

One way you could consider playing this is with CSOP Hang Seng Index Daily (-2x) Inverse Product [7500 HK].

This offers investors a way to short Hong Kong stocks, which should broadly track the mainland Chinese market.

As noted by ETF Strategy:

The ETP uses derivatives to provide twice the inverse daily return of the Hang Seng Index, a reference for the 50 largest companies listed locally in Hong Kong, meaning it profits from a decline in the Hong Kong stock market.

The exchange traded product (ETP) is up 20.5% over the past three months.

Now, this is not an official recommendation. Just something you may wish to consider and research on your own. And remember, while leverage can boost your gains, it will also boost any losses if the Hong Kong market rises instead of falling.

Moving on…

Your latest trading tips

Below you’ll find a brand new feature in your Monday editions of Port Phillip Insider.

Commencing today, each Monday you will have access to the latest trading insights from market veteran Murray Dawes.

Among the many feathers in his cap, Murray is the editor of our premium trading service, Alpha Wave Trader.

Using his proprietary ‘slingshot method’ Murray focusses on one thing — and one thing only — in the stock markets. Extracting huge profits from stocks, as fast as he can.

Click on the image below and scroll down to watch Murray’s latest video now.


Trading Plan in Action

[After predicting the sell-off in the S&P 500 last week, Murray takes you inside his trading service Alpha Wave Trader to see a live trade in action. Click on the picture to see how he chose his entry, initial target and stop-loss levels.]

I love it when a plan comes together. Watching the S&P 500 cascade to the downside last week with Alpha Wave Trader members short the biggest trade of the year has really put a spring in my step.

I’ve been posting videos outlining what I thought was coming as a case study in how I analyse charts. In today’s update, I’m going to bring you inside Alpha Wave Trader to see a live trade in action so you can understand the logic behind every decision that has been made.

It’ll give you an insight into how I choose entry points, initial targets and stop-loss levels. All of the analysis in the lead up to the sell-off can be found by going here. I will be giving Port Phillip Insider readers access to more comprehensive videos every Monday, but since my videos may be new to some of you, I thought it would be good for you to have access to recent videos.

My trading plan involves looking for entry points where I have a good chance of seeing a mean reverting move that will allow me to become free carried. Once I have taken part-profit, I adjust the stop-loss on the trade to a breakeven level. So if we have made $1,000 on the part we have taken profit on, we need to lose $1,000 on the remaining portion to be breakeven on the whole trade.

I ensure that the stop-loss after we have taken part-profit is at a point where I am happy to be stopped out. In other words, it has to be above or below a major point of resistance or support.

Once we have reached the initial target, our work is done. All we need to do is sit back and see what happens. As it stands, in the S&P 500 we have a breakeven stop-loss above the all-time high. So as long as prices remain below the all-time high, we can remain in the trade safe in the knowledge that no matter what happens we either breakeven or make money. No more sleepless nights.

If you’ve had bad experiences in the past while trading and have been tossed around by the volatility and ended up empty handed, you may want to watch the video to see that there is a different way to approach money making in the markets. It doesn’t involve having a crystal ball or being a master trader. It involves an expectation for mean reversion to happen a lot and a desire to take part-profit quickly because you know you don’t know the future. It is based on being humble in the face of market volatility, rather than thinking you know more than you do.

It accepts our own emotional weaknesses in the face of a gyrating P+L and forgoes some upside to ensure our mental landscape is kept clear and focused. In effect, it’s based on planting a lot of seeds and then hoping a few of them sprout.


Murray Dawes,
Editor, Alpha Wave Trader