I am getting a lot of questions on this, which either means a lot of people are still short China and/or people want me to clarify the shift.
Taking a step back, after being bullish on Chinese equities for all of 2009, our call on China for Q1 of 2010 has been Chinese Ox In A Box. That call has been that the Chinese economy is white hot and the Chinese will start to both proactively tighten and raise the value of the Yuan as they see inflation data roll in. The Chinese are doing exactly what they told us they were going to do. State Capitalism doesn’t require Barney Frank signing off on monetary tightening.
For the last 3 months, China’s inflation data has rolled in and that, combined with monetary tightening, has Chinese stocks down -7% YTD. Yesterday’s news is now today’s CPI report of +2.7%.
On the bullish side (ie. China is less likely to crash today than yesterday), money supply growth (m2) dropped again, sequentially, to 25.5% in February (from its November 2009 peak of +29.7%), and domestic consumption in China continues to prove to be a lot like America’s was in the 1920’s.
This generational urban migration of a lot of people has a lot more to consume no matter how many YouTube videos of empty Chinese cities get forwarded around the hedge fund community. We timed the short call on China as well as anyone. We get the short case.
In markets, timing is everything. We covered our short position in China (CAF) during the Lunar Year break, and this morning I went long it for an immediate term TRADE.
Mr. Macro Market has my back here. Or maybe I am following his…
Either way, I’m cool with being on the long side of Chinese currency and equities, for now…