Further confirmation of deteriorating economic conditions in China come via its latest employment release. Note that China’s unemployment rate is its “urban” rate, which does not include migrant workers, so real unemployment is certain to be higher. In addition, the level officially projected for 2009 would put it at a 30 year high. That means it is possible that the actual level could exceed the official forecast.
From Bloomberg (hat tip reader Michael):
China’s official urban unemployment rate jumped for the first time since 2003 and may climb to an almost 30-year high…Registered unemployment rose to 4.2 percent as of Dec. 31, Yin Chengji, spokesman for the Ministry of Human Resources and Social Security…It was 4 percent three months earlier.
A rate as high as the government’s 4.6 percent target for this year, which was announced by Yin today, would be the worst since 1980, official data show….
A separate survey of urban unemployment by the labor ministry, which covers the entire workforce, has been 1 percentage point higher than the registered rate since 2005, Yin said.
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anyone want to take bets on the day the revolution starts?
i have a better question, which ETFs can one short (or long) to gain the most exposure to a downside in the chinese industrial sector?
Pardon if I’m repeating but from last week:
Unemployment is now estimated to be at its highest levels since the Communist Party took over in 1949. Job creation and preservation has become a top priority of China’s leaders, who are acutely aware of
the role a deteriorating economy played in the 1989 Tiananmen Square protests.
[…]
Estimates by government research agencies for urban jobless top 18 million, or 9 percent of the workforce — a rate unimaginably high to those who remember the guaranteed cradle-to-grave employment during Mao’s time. This figure doesn’t include the growing number of jobless among the 160 million migrant workers who are mostly employed in factories. The rural unemployment rate could be as high as 20 percent. In addition, 1 million college graduates are not expected to be able to find jobs this year.
China’s social security minister, Yin Weimin, has said that the employment situation in China is “critical,” with people fighting for jobs that don’t exist. This year as many as 24 million people will be competing for as few as 8 million newly created jobs.
As China’s jobless numbers mount…
Or as we’ve seen before, late development with its necessarily greater capital:labor ratios has real limits especially within a preexisting labor surplus condition.
“anyone want to take bets on the day the revolution starts?”
In the USA or China? Once Citibank and Bank of America are nationalized, they’ll cut everyones credit limits and FICO scores will plummet.
People will not be able to get loans,
get apartments or even jobs.
Why credit scores are not controlled by the government is beyond me. All the credit rating agencies should be nationalized.
Not to be an idiot, but why all this forecasting revolution, etc? I understand that the Chinese social safety net is seriously lacking, but given the outsize rate of personal savings, shouldn’t workers be able to contend with a patch of unemployment? Isn’t that what drove them to save so much in the first place?
@misiti3780: You can short FXI or buy the ultrashort fund FXP.
In the USA or China? Once Citibank and Bank of America are nationalized, they’ll cut everyones credit limits and FICO scores will plummet.
Wow! You mean that everyone will have to live within their means? Tragedy…
Budgeting in order to live within one’s current cash flow levels, whether you are a business or as an individual, would actually be good in the long run and eliminate the threat of over-expansion in a resource limited environment.
“Budgeting in order to live within one’s current cash flow levels, whether you are a business or as an individual, would actually be good in the long run and eliminate the threat of over-expansion in a resource limited environment.”
So lose your job, no home, no medical care, now no credit?? I’m sure if you’re living on easy street, and don’t own your own business, you have no clue how a reduction in credit can effect an individual.
Sounds like a comment Phil Gramm would make. Unfortunately the world has become more complicated than most can comprehend. Credit scores are constantly being monitored by both employers and even housing complexes.
Comparing China in 2008 to 1980 is silly. It’s like saying there are Politicians are more corrupt than they have been in decades. The measurement is suspect, the messenger is suspect, and it is hard to deduce much from the data except that the sky is falling.
“@misiti3780: You can short FXI or buy the ultrashort fund FXP.”
As a trader, I implore all to stay away from FXP. It is a double short fund that has *declined* while the chinese market fell in half.
It is also extremely difficult to use the HongKong stock market as a proxy for the chinese economy in this environment.
I second bg’s comments about FXI and FXP – FXP is *NOT* a good way to bet on a fall in the value of Chinese stocks.
I’ve been watching FXP since its inception, and bg’s comment that FXP declined at the same time the Shanghai index declined – exactly when one would expected FXP to rise – is true. You can verify this for yourself by overlaying the two graphs. If I understand the prospectus for FXP correctly, the reason for this is because FXP actually moves opposite to the value of ADRs of companies listed on the Shanghai index, not to the value of the Shanghai index itself. This obviously makes a HUGE difference. I didn’t fully appreciate this before I invested the first time, so I’m hoping I can warn would-be FXP investors out there before they invest in it too.
the explanation for the fxp misbehavior is a mathematical one due to the fact the rebalance each closing. If china stock market “C” gains 10%, say from 100 to 110, then the double inverse fund drops from 100 to 80. If the following dat C goes back to 100 (11.11% drop), then FXP rises 22.22% to 97.777
Over time this causes decay. But options also decay, but it doesn’t mean they are unfair, just very dangerous and hard to understand.
I am not against all double shorts (for example I use SKF). FXP is expecially insideous because of the large amount of volatility in china, and my lack of trust in the transparency of that index.
fyi…tsc had a couple articles about double shorts…the conclusion was that you are basically short volatility when you go long the double short.
This is anon 9:42.
bg said:
“the explanation for the fxp misbehavior is a mathematical one due to the fact the rebalance each closing. If china stock market “C” gains 10%, say from 100 to 110, then the double inverse fund drops from 100 to 80. If the following dat C goes back to 100 (11.11% drop), then FXP rises 22.22% to 97.777″
This is certainly true, but this doesn’t explain why FXP went down at the same time the Shanghai index went down. Since FXP in supposed to track the Shanghai index, it should have gone up during this period (first half of 2008). Also, all double shorts are supposed to rebalance every night, not just FXP, so whatever anomaly shows up in FXP should in theory show up for all others (e.g. SKF, SRS, DUG, etc.). From my experience though, FXP is the only double short that has moved in the same direction as the index it’s supposed to track. All others move in the direction they’re supposed to move, although the percentage moves sometimes isn’t quite correct.
If nothing else, I hope this discussion of FXP shows the uncertainty behind its movement. Like bg, I’m not opposed to double or triple shorts either (I’ve been using FAZ myself lately), but I just don’t understand FXP in particular. If bg or anybody else has a more concrete explanation, especially why it moved in the same direction as its tracking index, I’d much appreciate hearing it.
Its simple:
FXP is a share of the fund.
If there is a buyer who claims that the fund is overvalued, even if chinese markets have dropped, the trading for FXP is during US market time. Therefore, its not the funds responsibility to buy/sell FXP to bring to its current price level (ie if the fund closed that same day, this is how much each share is worth)
Think of it like the fed maintaining the fed funds rate through their market operations (if borrowing rate is too far from their target rate then they intervene). Otherwise, its up to the investors to determine how much they are willing to spend.
However, FXP’s declines are sharper than its theoretically should move. Maybe the idea is to short FXP when the chinese markets stabilize for a better buck out of the FXP’s normal trading by market makers.
Anon 9:42
You’re not missing anything unique about FXP, the explanations are
1) essentially being short volatility and
2) the fact that a -10% index day, followed by a +10% index day will leave the index underwater, AND the double short underwater EVEN IF the double short tracks the index percentages perfectly. The articles above illustrate the math behind this.
Also, you need to note that FXP double shorts FXI — which may or may not be an adequate reflection of China. (hint – its not really)
If you chart FXI and FXP over various horizons you can see the double short works for most time periods, but the shorter the time period the better it works. They key exception (and likely the basis for your comments) would be Nov and Dec 08 — thus the short volatility theme interpretation above.
For what its worth, I am up 40% on FXP right now. For the reasons above its a trading vehicle, not a buy and hold. Timing is key, and I would be lying if I suggested I was not uncertain about when to unload . . .
-rix
PS:
I thought someone had posted links, but I don’t seem them now.
Here’s a decent link on how both a tracking index and a double short can move in the same direction
http://seekingalpha.com/article/104703-explaining-inverse-and-leveraged-etfs
While leveraged ETF have the unfortunate quality of putting an investor in the position of being short vol (which is the big reason the sector ones in particular, which are more volatile than ones against broad indices, show big decay over time) these articles attacking these ETFs completely ignore the sizable capital gains distributions they paid. DUG, for instance, made a capital gains distribution of 20%. That is omitted in the price charts in all these articles attacking the double shorts. Which in turn makes me wonder how well these critics understand them.
My key point is that FXP is the most dangerous of the bunch due to the exception decay due to the high volatility in the underlying, and because it is tracking Hong Kong, not Shanghai A shares.
I am currently in both SKF and FAZ, but I am exceptionally trigger happy on timing, and aware of the volatility math.
The distributions aspect of double shorts (I think) is primarily in DUG and SRS, which are markets I don’t follow.
I am pretty sure all the double shorts had big distributions. SDS and I am pretty sure SKF did (you needed to be a holder of record as of Dec 22, I believe). If you look at the price charts, you’ll see a big drop on the day the went ex-cap and ex dividend (same day).
I wanted to invest in FXP in order to play the downtrend which will surely materialize at one point.
After reading all suprising comments regarding the adverse movements of FXP when the Shanghai is falling I had a look at the graphs on one month of FXP, Shanghai index and Hang Seng index.
conclusion: While Shanghai has been falling since the 4th of August, the Hang Seng index has remained more or less at the same level since that date and has not recorded the fall exbibited by the Shanghai index.
since FXP tracks tracks FXI (which itelf tracks part of the Hang Seng) the last performance makes sense.
My question now is how do I play the downtrend on the Shanghai index through ETFs (I can't short sell or buy puts with my broker)
thx
If I am wrong on a point do let me know