Trader’s Narrative

China’s stock market ignored all that talk in the summer about a bubble and continued to climb higher. Even a stamp tax increase imposed at the beginning of June this year didn’t impede its meteoric rise:

Usually the increase in transaction costs have been an effective way for the Chinese government to control rampant speculation in their stock exchange. See a history of previous stamp tax increases and their effect on the Shanghai market.

By reaching 6000 in mid October, the index has now multiplied itself 6 times (off its low in 2005). Yet that is still not as impressive as its last bull market in the early 90’s.

If you’re still holding on to the bearish thesis on China you have a new vehicle with which to short China: the UltraShort FTSE/Xinhua China 25 ProShare (FXP). This new ETF provides you with twice the inverse of the Chinese market. But keep in mind that that is merely its goal. It also comes with a hefty 0.95% MER. And remember, you’re going long to establish a short position!

As well, the UltraShort FTSE/Xinhua China 25 ProShare (FXP) isn’t really exposing you to actual Chinese shares. The only way I know that you can get real Chinese equity exposure through North American exchanges is through Morgan Stanley’s China A-Share Fund (CAF).

While the Chinese stock market is white hot, non-Chinese are not allowed to participate. The only thing we can do is the next best thing: proxies in the form of ADRs or neighboring Asian markets like Hong Kong and Singapore.

Meanwhile, Li Ka-shing, Asia’s richest man said that the Chinese stock market “must be a bubble” and that he was worried about it. But I have a nagging feeling this mania will only get crazier (before it eventually bursts).

Reports of grandmothers investing and trading are trickling in already but we still have to see a truly spectacular zoom higher. I wouldn’t even be surprised if the wide eyed new investors in China would view Li Ka-shing’s from a conspiratorial point of view (”he wants to jawbone the market lower so he can buy more”).

If you want to play this volatile market, either long or short here are your options as an outsider:

ETFs
There are also two Exchange Traded Funds: iShares FTSE/Xinhua China 25 Index Fund (FXI) and the Powershares Golden Dragon Halter USX China Portfolio (PGJ). Who names these things?

The relevant Asian market ETFs are: Singapore iShares (EWS) and the Hong Kong iShares (EWH). Whether the Chinese market continues its meteoric rise or crashes, these are the ETFs which will be most effected.

Chinese ADRs
Here is an alphabetical list of Chinese ADRs trading on US exchanges.