Over two weeks ago, I wrote a post suggesting going long US Municipal Bonds and China , as a “knife catching” trade . Those trades haven’t fared too poorly since. That said, I recently listened to a fund manager who is (arguably) the most bearish manager out there (on China). I won’t pretend that I’m suddenly an expert, just because I sat through a very detailed, and well-researched presentation on the country. That said, all prospective investors in China should ask themselves the following questions:

China GDP

  • Do you know what’s going on in the country?
  • Specifically, do you know how China’s banking system works?
  • Do you know how large China’s banking system is? In absolute terms? In relative terms?
  • Do you know what a ‘deposit’ in China is? Do you know how comparable said deposits are compared to a US bank’s deposits?
  • Do you know why short term rates skyrocketed recently?
  • As far as vacant properties go, if Ordos is NOT the exception, and actually indicative of what’s going in more populated centers within China… what would you do?

I currently believe one should stay away from going long China until there has been some cleansing in its banking system and/or some drastic Renminbi actions. This doesn’t mean there is not room for counter-trends to the upside (which should be taken as a gift to SELL; see the US in 2008). But being too cute can backfire.

Thesis: China’s banks will have to take some pain, or its currency must take a hit. I don’t think there will be another way around it. Steer clear until either happens.

For the more speculatively inclined: shorting always, and everywhere is a precarious undertaking. That said, there is more than one way to skin this cat.

China: Do You Even Know What You Do Not Know? via LST