Back in April, I recommended selling the Chinese market short, a move which many thought "suicidal." Chinese industrial numbers at the time looked fantastic - and still do. Nonetheless, the Shanghai Composite Index tanked exactly as I suspected, going from 3130 to 2365, a 32% loss (providing a 32% gain for short-sellers) in only two and a half months.The market has since recovered slightly (to 2560), and the world economic picture looks somewhat brighter. So the question is, should you finish taking profits or keep the short sale going?
Despite drastic government measures, the euphoric mood of the Chinese market appears to have barely subsided. Prices remain stratospheric. Speculation remains rampant. Gleaming condos continue to rise.
A Xinhua news agency article from July 24th (Realty trouble in the offing), recognized that the housing bubble is still out of control, bluntly noting that "skyrocketing housing prices are the outcome of artificial speculation." In addition to calling the market "bloated," it adds that price rises could result in "social conflicts and lead to social unrests."
No, the Chinese meltdown is not over. But, the market fall may take a short hiatus (ie. make a slight recovery) as the world situation temporarily improves. Hopefully not for long, however, since the longer the Chinese euphoria lasts, the more devastating the final fall will be. Be ready to sell short again when the market plateaus.
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This will likely be the last article for the next two weeks, as I am off to Shanghai to find out about the market firsthand.
Thank you for reading The Frost Report.
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Additional reading: Sell the Chinese Market Short
Big realty program to solve house woes
Foreign investors eye China's realty market
