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Time to Short China With ETFs on Feeble Recovery?

China's economic recovery has been faltering amid weak domestic and external demand, producer deflation and rising trade tensions with the United States. According to official data, profits at China’s industrial firms have plummeted in the first four months of 2023, falling 20.6% year-on-year.

This continuous slump was experienced across the board, with industrial firms witnessing an 18.2% drop in profit in April alone. Firms are grappling with shrinking demand, both domestically and in the country’s key export markets.

Pressure on Industrial Giants

Even China’s tech titan, Lenovo, is feeling the squeeze. Despite being the world's largest PC maker, the company reported that quarterly revenue and profit plunged in the first quarter, leading to a workforce cut of around 8% to 9%. On a similar note, the steel industry is feeling the pinch with steel reinforcing bar prices hitting a three-year low, and only a third of the country’s mills are currently operating profitably.

Foreign and Private-Sector Firms Feeling the Burn

Private-sector firms experienced a 22.5% profit plunge from January to April, with foreign firms seeing profits slide 16.2% during the same period. With 27 of 41 major industrial sectors seeing a decline in profits, the ferrous metal smelting and rolling processing industry suffered the worst slump at 99.4%.

Growth Forecasts Trimmed

The Chinese economy advanced 4.5% year over year in Q1 of 2023, accelerating from a 2.9% growth in Q4 and topping market estimates of 4%. It was the strongest pace of expansion since Q1 of 2022, amid efforts from Beijing to spur the post-pandemic recovery.

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Despite this growth, the recovery is considered to be on shaky ground. The evidence is compelling enough that investment banks have lowered their 2023 China growth forecasts, following a disappointing April, per a CNBC article.

This downward revision is despite the World Bank and others having raised their China growth estimates for 2023 earlier, based on promising signs of recovery. China set a modest GDP target of around 5% for 2023. Last year, the economy added 3%, missing the government's goal of about 5.5%.

Should You Short China With ETFs?

One way to bet against China's economic prospects is to short China with ETFs. By shorting China with ETFs, investors can profit from the decline in the value of these funds as Chinese stocks fall. China’s debt-laden real estate sector has also been grappling with pressures as sales remained subdued. The government is also not letting developers to offer steep price cuts in case such price cuts put pressure on the baking system.

ETFs in Focus

Against this backdrop, below we highlight a few inverse China ETFs that gained past month.

Direxion Daily FTSE China Bear 3X Shares YANG – Up 13.7% Past Month

AXS Short China Internet ETF SWEB – Up 8.5%

ProShares Short FTSE China 50 YXI – Up 5.1%

Bottom Line

However, one must not ignore the complexity of the global economic environment and the significant role that China continues to play in the global economy. Hence, any decision to short China with ETFs should be made after a thorough analysis of market conditions, global economic indicators, and individual investment strategies.

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ProShares Short FTSE China 50 (YXI): ETF Research Reports

Direxion Daily FTSE China Bear 3X Shares (YANG): ETF Research Reports

AXS Short China Internet ETF (SWEB): ETF Research Reports

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Zacks Investment Research