If there's a common theme to the way I approach short selling, it's that I'm attracted to potential bubbles. We can debate whether or not gold is really in a bubble state. And I get that there is an argument to be made for being on the long side of the gold trade. But my attraction to shorting gold is a perception of a potential bubble there.
Similarly, I am getting this sense that China is in a bubble. What's more, their decision over the weekend not to raise their rates will only contribute to the formation of a bubble in their economy. Their real estate market is red hot, reminiscent in some ways of the real estate bubble we experienced here before the 2007/2008 bust. Their inflation is accelerating, though it may be unfair to focus on recent numbers as their always volatile food segment has been running around 10% recently. Still, their broader based inflation index continues to rise. Eventually, inflation in China must be addressed.
When it does get addressed, prices of Chinese financial assets are likely to decline as well.
There aren't many ways to take a short position against China, but one that's available to most investors in the United States is the iShares FTSE/Xinhau China 25 ETF (Symbol: FXI). Option contracts trade on this security, so if you're uncomfortable shorting the ETF's outright, put options are available to take a position against this index.
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