Panda bears

ONE year ago bears on China were a rare species. People scoffed at Jim Chanos, a well-known short-seller, who predicted that China would end up “like Dubai times 1,000, or worse”. Nor did they heed Hugh Hendry, the eccentric boss of Eclectica Asset Management, who posted a homemade video of himself wandering Chinese streets and gawking at abandoned skyscrapers on YouTube.

The view that China is heading for a sharp slowdown has now caught on. Few go so far as to predict an Emirate-style crash, but talk of a “hard landing” is rife. Concerns abound that a sharp Western slowdown could cripple demand for Chinese exports, that shadow lending and local-government debt are out of control and that property prices are bound for a correction. Fraud allegations against several Chinese firms have made investors jittery, too.

So pervasive is the gloom that one Chinese hedge-fund manager who isn't “that bearish on China” describes his position as “contrarian”. Société Générale recently released a report saying China is the “world's most crowded short”. In Hong Kong, where many bears express their views on China because it is not possible to short mainland stocks, long positions still outnumber shorts by six to one. But that's down from 11 to one in January, according to Data Explorers, a research firm.

Pessimists have focused on industries that would be hardest hit by government tightening or a sustained slowdown, which means property and construction companies in particular. Anhui Conch Cement, China's largest cement manufacturer, is the most commonly shorted Chinese company listed in Hong Kong. Commodities such as copper have also been battered recently, as have financial stocks. Some investors are more creative. Mark Hart of Corriente Advisors, a hedge fund, has bought put options on the yuan, betting that the value of the currency will decline. Mr Hendry has purchased credit-default swaps on Japanese firms that are heavy exporters to China.

Pessimism has proved profitable recently. Hong Kong's Hang Seng index has dropped by more than 29% so far this year, more than the French and Spanish stockmarkets. Mr Hendry's “short China” fund was reportedly up by nearly 40% in the year to August. Messrs Chanos, Hart and Hendry had positions in place for a while before there were any signs of China wobbling, however. Without a sustained fall in asset prices, it is unclear whether they will make back much more than they spent.

An executive at a large hedge fund that went “net short” on China in the spring says that the trade is riskier now that equity prices have declined so much. “If you're shorting shares at seven to eight times earnings, it's a bold bet,” he says. Investors face the additional risk of being caught in a “short squeeze”, when the price of a stock is pushed up and short-sellers have to cover their positions. Regulators could also intrude: there are calls for a ban on shorting in Hong Kong. Needless to say, that hasn't stopped the bears from warning that China has further to fall. Mr Chanos, who has never been to China, is rumoured to have a trip planned this month to Hong Kong. He will get a more admiring reception now than he would have 12 months ago.