'Being Long China May Be Dangerous,' Says Analyst

Think that China may quickly bounce back from the economic downturn? You might want to think again.

The Bright Spots

Of course there are plenty of reasons to believe that China is an unstoppable engine of economic growth. Just recently, Goldman Sachs turned uber-bullish on China -- and raised their real GDP growth forecasts for both 2009 and 2010.

And optimism about China stretches across a wide range of American industries, from equipment maker Caterpillar to KFC-chain operator Yum! Brands.

They say its insatiable appetite for everything from heavy machinery to fast food -- due at least in part to the $585 billion stimulus -- is stabilizing the market and providing a growth outlet just when they need it most.

Also, China's gross domestic product growth would suggest strength; in the first quarter growth was recorded at 6.1 percent. True that's the weakest since quarterly figures were first available in 1992, but it's scorching when compared to the contraction happening in Western nations.

It absolutely makes sense to think that China will lead the world out of the global recession. But something is fishy.

Buyer Beware

Steve Cortes the founder of Veracruz, is very cautious on China. In fact he tells us, “being long China is dangerous!"

Cortes believes strongly that if China's growth was all it's chalked up to be then oil would be trading differently. The 'tell' he reveals is the price action in crude. It’s been sideways.

“China is still a smoke stack country. They're about making toys, textiles and steel. Things that require petroleum. If China was growing as advertised, crude would be far higher."

Also he says if more investors believed in the China story, energy shares would also be climbing, broadly. That’s not the case either.

What’s the bottom line?

Cortes is convinced that there's more than meets the eye to China's growth. "I’d be short the FXI," he counsels. "As long as it stays below last week’s highs it should go far lower."

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