China Short Squeeze; Chanos Hedge

Chidem Kurdas

Bullish versus bearish views on China remain in striking contrast. Khiem Do, portfolio manager of the Asia Pacific Fund and head of Asian multi-asset at Baring Asia, is on the bullish side. Among the stocks he favors are Asian financials. In the opposite camp are short sellers who are betting against a top Chinese bank.

Many New York-based hedge funds are shorting the Industrial & Commercial Bank of China Ltd. Mr. Khiem Do recommends a trade that would exploit these shorts.

Buy ICBC and you will make money when they cover, he suggested at a conference. The audience laughed at the quip. But if a lot of people bought ICBC, a classic short squeeze would develop—to exit their position, short sellers would be forced to buy ICBC at a rising price. In this situation the buyers’ gain is the short sellers’ loss.

That’s a risk in betting against China. Short seller James Chanos, the best-known name among the China bears, said that Chinese banks are built on quicksand. That was this Spring. Since then, while Chinese growth has been slow, there was no financial collapse. The SPDR S&P China ETF is up about 15% in the past six months.

That has to be tough on short sellers, who typically have to replace borrowed shares within months. But Mr. Chanos appears to have a hedge—he holds the SPDR S&P China ETF.   Moreover, in six months he’s about doubled the SPDR S&P China ETF shares he owns. The upside on the index compensates a bit for any short selling loss.

For his part, Mr. Khiem Do acknowledges a major problem even as he sees bright prospects. “Chinese companies want to be big rather than profitable,” he complained. But he expects that to change and firms to focus more on earnings and profitability, especially in the financial industry.

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Tags: Asia Pacific fund, China, Industrial & Commercial Bank of China, James Chanos, Short selling, SPDR S&P China ETF