Want To Short Chinese Stocks? Goldman Has A New Product For You

Want To Short Chinese Stocks? Goldman Has A New Product For You
Written by:
Jayson Derrick
February 18, 2020
  • Shorting Chinese stocks is notoriously difficult, although not impossible.
  • Goldman Sachs will now offer a derivative product based on a basket of Chinese sensitive stocks.
  • The case for shorting Chinese stocks is not new but intensified amid the coronavirus outbreak.

Investors looking to short Chinese stocks have found it difficult to do so. The Chinese stock market is notorious for high costs and heavy regulations, especially for foreign investors. In fact, Chinese law only allowed short selling in 2010 and came with a set of rules, like only blue chip stocks with solid earnings and minimum volatility can be shorted.

But over the weekend, a U.K.-based research group called Quant Insight teamed up with Goldman Sachs to give investors a new “synthetic” way for investors to short Chinese stocks, the Financial Times reported. 

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How It Works

Quant Insight created a group of 40 U.S. stocks with exposure to China that is closely correlated to the performance of China’s CSI 300 benchmark. Wall Street giant Goldman Sachs will include the new basket of stocks in its digital platform called Marquee which implies it can sell its clients derivatives based on the basket, according to FT.

Shorting this basket of stocks through a Goldman Sachs derivative product will come with a cost of borrowing of around 2%, Mahmood Noorani, head of Quant Insight, told FT. The attractive fees address a “clear pain point” for global investors who struggle to short Chinese stocks.

“There are often structural impediments in capital markets, but this product solves an issue,” Nicholas Gelber, a managing director at Goldman Sachs’ synthetic products desk, told FT. “There are other ways to express a view on China, but it comes down to all-in costs.”  

The Case For Betting Against China

The case for betting against China has been made for years by multiple known bears. But most recently, the spread of the coronavirus presents a new thesis on why Chinese markets are poised for a setback.

Evan Brown, head of multi-asset strategy at UBS, told FT the coronavirus will likely result in a “big hit” to its economy in the first quarter. The longer the virus spreads and shows no signs of slowing down, the bigger the impact it will have on the country’s global supply chain role.

Shorting China Nothing New

James Chanos, head of the Kynikos Associates hedge fund, is considered by some to be the biggest Chinese bears. His negative stance on the country dates back to 2009 when an analyst at the hedge fund concluded the country is building 5.6 billion square meters worth of new high-rise buildings.

Chanos first assumed his analyst made a mistake in calculations or metrics. But once the numbers were double-checked, the fund manager concluded shorting China is a “once in a lifetime kind of thing,” the Financial Times reported in 2018.