While China's Growth Prospects Contract, Pounce on This Inverse ETF

China’s gross domestic product (GDP) stumbled in the third quarter, growing 4.9% instead of the 5.2% expected by Reuters analysts.

While this doesn’t bode well for traders expecting China to continue a bullish recovery following the start of the ongoing pandemic, it does open opportunities for an inverse solution: the Daily FTSE China Bear 3X Shares (YANG). The leveraged ETF is up 22% over the last six months, propelled by slowing economic growth in the second-largest economy.

“Since entering the third quarter, domestic and overseas risks and challenges have increased,” said Fu Linghui, spokesperson for the National Bureau of Statistics.

YANG seeks daily investment results equal to 300% of the inverse (or opposite) of the daily performance of the FTSE China 50 Index. The index consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange (“SEHK”).

YANG Chart

Law of Diminishing Returns in Q4?

A confluence of events could be blamed for the lower-than-expected GDP number. The Evergrande crisis certainly highlighted issues with China’s real estate sector, which contributes a large piece of the country’s economic pie.

A power shortage also hampered manufacturers’ ability to operate at full capacity. Additionally, pockets of surging COVID cases once again took their toll on China’s economy.

The case for YANG can also carry over through the to rest of the fourth quarter. Despite falling almost 60% in 2020, the fund has rebounded to a paltry but still positive gain of 1% in 2021.

“China’s once leading growth recovery is losing momentum going into [the fourth quarter],” said Bruce Pang of China Renaissance.

That’s not to say there’s not also a bullish case to be had if China’s government can respond in time to stymie the lack of growth. Expect China to begin implementing measures to help prop up the economy.

“In response to the ugly growth numbers we expect in coming months, we think policymakers will take more steps to shore up growth, including ensuring ample liquidity in the interbank market, accelerating infrastructure development and relaxing some aspects of overall credit and real estate policies,” said Louis Kuijs, head of Asia economics at Oxford Economics.

If the bulls can prevail, traders can play the flip side with the Direxion Daily FTSE China Bull 3X ETF (YINN). The fund is down about 40% on the year, but could be a potential rebound play heading into 2022.

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