New ETF to Short the Shanghai Market
Richard Komaico at the Asia Times Online says:
On November 8, Proshares launched an ETF called the Ultrashort FTSE/Xinhua China 25 Index (FXP). The FXP is based on an index of the 25 largest corporations in China, and it is an inverse fund. This means is that when those 25 corporations decrease in value, the FXP increases in value. Also, the FXP is a leveraged fund. So for every 1% decrease in the value of those corporations, the FXP will gain 2% in value. The FXP effectively enables international investors to hedge against the growth of the Chinese market and make a two-fold profit in doing so.
"Proshares is definitely the industry leader in inverse and leveraged products," according to Lawrence Rosenberg, Neal Weintraub and Andrew Hyman, co-authors of ETF Strategies and Tactics: How to Hedge Your Portfolio in a Changing Market, which will be released in March. "The FXP has created new opportunities for investors where none existed before," said Rosenberg, the former chairman of the Chicago Mercantile Exchange.
Almost US$100 million has been invested in the FXP since it launched two weeks ago. "On opening day, FXP had almost a million shares traded, which is unheard of for an ETF," said Proshares managing director Steve Cohen. "I believe China may be in for a bubble, like the tech bubble of the '90s, and we at Proshares want to provide a tool for investors to deal with that situation. I have my personal opinion, and we at Proshares have our opinion, but that doesn't really matter. All that matters is how investors feel about the market. Right now, the investors are really nervous."
The launch of FXP, in context, must be taken as a serious omen. To appreciate this omen, let us review the problems facing the Chinese economy, the authoritative commentaries on these problems, and the economic theory that provides their grounding.
One of the most pressing problems facing the Chinese economy is inflation. Officially, inflation in the third quarter was 6.2%, which is already an uncomfortably high rate. Multiple analyses have indicated that after adjusting for price controls, the real rate of inflation may be closer to 10%. This rate is simply unsustainable. Moreover, all of the government's traditional policy instruments for controlling inflation have been rendered ineffective by the frenzy of the market.
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