If you think that the Chinese government’s recent moves to cool its economy will persist and cause stocks there to drop further, you may want to short the Chinese market through an exchange-traded fund (ETF). The ProShares UltraShort FTSE/Xinhua China 25 (FXP) offers just such a fund.

The ETF seeks daily investment results, before fees and expenses, that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. The index, consisting of 25 of the largest and most liquid Chinese stocks listed on the Hong Kong Stock Exchange (HKEX), caps the weight of any constituent stock at 10% to ensure broad representation of the Chinese market.

For the past two years, China has pumped money into its economy to spur economic growth. However, trying to manage a major economy carries risks. Chinese government officials now are concerned that the economy is overheating, so they are taking action to fight ever-growing inflation that has put tremendous pressure on its poor. Indeed, China had a gross domestic product per capita of just $6,700 in 2009, ranking 130th in the world, just behind El Salvador and the island nation of Saint Pierre and Miquelon, according to the Central Intelligence Agency (CIA). 

Concerns about the potential for civil unrest reportedly led the Chinese government to take steps to impose price controls recently for certain basic necessities such as food and energy. In addition, the country’s central bank, the People’s Bank of China, raised interest rates and forced banks to hold more reserves starting Nov. 16. Such measures typically curb economic growth.

However, I have my doubts about whether these steps alone will slow the country’s economic growth sufficiently. It would not surprise me if the Chinese government took additional action to rein in the nation’s economic growth. The chart below shows how FXP has risen lately in the face of a Chinese stock market pullback.

Of course, the combination of holiday cheer and the equity market’s traditional rise in December has me reluctant to take any new short positions right now, even if China seems to be a prime candidate. For those reasons, I am holding off on recommending FXP to my subscribers -- but I am watching the fund closely.

For advice about which ETFs to buy and to sell, I urge you to sign up for my ETF Trader service by clicking here. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.