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SHORT SELLING Chinese property companies’ shares on the Hong Kong and New York Stock Exchanges by certain international hedge funds has attracted considerable attention recently. These funds and some other market players believe it’s just a question of time before the Chinese property bubble is pricked and the government won’t be able to do much about it.

One of the problems for those hoping to make money from a financial crisis in China is that, with very few exceptions, short selling is prohibited. But an increasing number of companies are being listed in Hong Kong, where Chinese shares and derivatives can be freely traded. Some Chinese companies are also listed on Nasdaq in the United States, where there’s a lively interest by short sellers. Some Japanese companies that have close ties with the Chinese construction industry are also sold short.

During the course of President Hu Jintao’s visit to the US, China’s role in the world economy was closely scrutinised worldwide and it was noticeable that leading analysts asked penetrating questions about the sustainability of the country’s enormous growth rate. Many countries – including especially South Africa’s commodities companies – are largely dependent on China for their prosperity.

Issues such as China’s artificially cheap currency and the large-scale creation of money have raised many valid questions. As the graph shows, since late-2007 – when the extent of the financial crisis began becoming clear – its money supply soared by around 79%. That’s approximately five times higher than the growth in the US’s money supply, about which such a fuss is being made.

Jintao’s government is trying to bring growth in China’s money supply under control with, for example, higher interest rates and limits on bank loans, since property and food prices are rising so sharply. It’s being asked fairly widely whether that will form the basis of a significant fall in growth. For China, a fall to say 5% would amount to a recession, which could have widespread consequences – not only as far as jobs are concerned but also politically.

The international Fitch Ratings group has calculated a fall in the growth rate to 5% would cause a drop of around 20% in commodity prices, which would be a setback for countries such as SA, Brazil, Australia, Canada, Russia and other raw materials exporters. At the same time, it could set off debt crises.

In a comprehensive study of debt crises, Professor Kenneth Rogoff and Professor Carmen Reinhart, of Harvard and Maryland Universities respectively, found falling commodity prices have historically often been the trigger to produce debt crises. But while China’s success rests largely on its huge export growth – due to an important extent to the artificial exchange rate – there’s also a realisation that a serious downturn in its economy would hit everyone. In fact, it’s regarded as a threat to international stability.

So what must stock exchange investors do? Some commentators recommend profits in vulnerable companies should be partly realised and patiently held in cash until a bear market brings value to the fore again. At the very least it’s recommended portfolio values should be protected by, among other things, using derivatives such as options.

One of the analysts, who believes China won’t continue performing so far above everyone else for much longer, is Tim Moe, chief Asia-Pacific strategist at Goldman Sachs. He feels a pause is on the horizon. But there’s another school of thought that feels China will again record a double-digit growth year. If the US and Europe fare somewhat better in 2011, it will affect markets positively in the midst of plentiful, cheap money in developing countries, which leaves investors with a difficult choice and forms the backdrop for the nervousness about China’s financial situation.
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