Short China Tech index via Market Neutral LONG/SHORT Pairs

•SHORT: Golden Dragon Index, US listed China Tech (ETFs: PJG & CQQQ) or FXI BlackRock iShares China Large Cap 

•vs LONG: NDX (US), EWJ (Japan), EWT (Taiwan), or even FXI (China large cap)

China cracking down on its successful tech firms one by one, citing whatever reason by the Chinese gov, really kicking off since Xi himself canceled Ant Financial IPO and Jack Ma taking a multi month hiatus from life. Really doesn’t matter what the stated reason for whatever the crackdown is - clearly the big picture consistent theme is to reclaim social authority and control away from too-big-to-succeed China tech.

Latest victim is Chinese ride hailer Didi (NYSE: DIDI), which just listed on NYSE in a $4.4bn IPO less than a week ago. Chinese internet regulator crushed them the next day banning new registrations. Sunday, took it further banning the app availability on app stores. So much for that $4.4bn raised. Today at US open, first reaction coming back from holiday, DIDI -24% loses -$20bn in market cap. Other megacap Chinese listed names like BABA & taking hits. Weibo (WB) is +8%, which looks fantastic. Until you consider premarket price action where stock was +40% as recent as an hour before the open on Reuters headlines of state takeover surge, abruptly reversed when Bloomberg reached out for comment and was told “untrue headline.” 

This is why you use index ETFs that focus on the overall US listed China tech sector, and not single stocks (in either direction long or short) - because of what they call in business school - the crazy shit risk premium, or implied imposed vol. 

PJG ETF is the actual Golden Dragon Index benchmarked one (US listed Chinese tech stocks). Shorting PJG might be a bit more on the borrow side given its relatively small AUM but certainly doable (ETF share creations make “borrow / locate” not as much an issue). CQQQ is basically what you think it is, but actually holdings are weighted at “only” a bit over 50% tech sector (CQQQ still -3.2% on the day). And FXI is just iShares general large cap China, $5bn AUM & liquid, with big tech weighting, but not pure tech / heavy tech weighted. 

Market neutral pair trading is not just a short China tech bet, but can be looked at as a LONG ex-China tech related return enhancer, with minimal capital outlay (proceeds from short sale used to fund long position, aiming $ for $ notional size : i.e. open new short sale, +$2k received  → open new long, cost -$2k = market neutral ex transaction & borrow fees)

For example, from mid Feb peak on China tech (as well as on NKY and a host of other peaks);

QQQ currently +7.5% (and as also -8% in between) with a ~$300/share out of pocket cost.

Whereas a Long QQQ / Short CQQQ returned +45% over the same period, cost neutral, and minimized directional volatility. 

Long EWJ: long Japan exposure, which is flat on the year as worst H1 2021 country index (underperforming China), but will be beneficiary of rotation flows on delayed Japan reopen trade start - but only after Tokyo gives the world COVID again at Olympics this month & that dust settles. So while being long EWJ is an opportunity cost at best, long EWJ / short China returned 40% vs China tech and 30% vs China large cap (FXI)

Long EWT Taiwan / Short FXI China: forget ”China is the factory to the world” - in 2021, the factory to the world of mass consequence is Taiwan / TSMC / semiconductor manufacturing-  long the world‘s most critically in demand ”factory to the world.” Taiwan’s biggest risk is China aggression, so if China storms Taiwan HK style on steroids, short China leg of the trade works. 

•Long China large cap (FXI) / Short China Tech (PJG, CQQW) - not a regional arb, but rather more of a sector/CCP policy relative bet. Long China / short China tech returned 20%.

Don’t ever touch any Chinese IPO listing in US. Imagine going long DIDI last Wednesday for +16%, and THEN the gov steps in?? That was clearly purposely timed as a very blatant middle finger to investors - could’ve acted 48 hours sooner if it’s really that big an issue.

Happy belated, CCP & America!

follow up July 26 ↓ 

How to EXIT trade: Short China Tech / Long US Tech (Short CQQQ / Long QQQ)