Last Tuesday, Dan David, CIO of FG Alpha Management and Co-Founder of GeoInvesting, spoke with Bernie Lo and Oriel Morrison on CNBC about China currency manipulation, short selling and Hong Kong regulation. He also discusses why he thinks it is a good time to be short markets in China.  Below you can watch the interview and read the full transcript.



Dan David – CIO of FG Alpha Management on CNBC (1-24-17)

Interviewers: Oriel Morrison & Bernie Lo

Oriel

Let’s talk to Dan David. He’s the CIO of FG Alpha Management, joining us live from New York. Dan, you are one of the people that just want this conversation to go away; it is outdated! If you look at everything that China is doing right now, the restrictions they are having in place is to stop people from moving capital out of China, rather than the other way around. This would serve to prop up the currency rather than talk it down. Correct?

Dan

China is undoubtedly defending their currency and has been for some time. They sold over 140 billion dollars (in U.S. dollars) last year defending their currency. They’ve come up with makeshift policies to stop capital outflow. So, what we’re dealing with here is–the kind of world we’re living in right now– where alternative facts matter, whatever alternative facts are, but we seem to think here in the United States that China is devaluing their currency and keeping their currency low when the fact of the matter is if they stop defending it, it’s going to be a pretty serious problem that will likely result in another 50 cents to a dollar.

Bernie

Right. Dan, let talk about your forte and what you’re really here to talk about, and that is playing China, investing in China, but by doing it in a different way–doing it in the opposite direction. How malleable is the China market right now? I mean, in terms of shorting opportunities, stocks that are available for shorting – how has that developed over the past few years? Has there been impressive growth? Has the list grown to a very useable, very functional amount?

Dan

It’s a great time to be short either in China or here in the United States. You definitely want to be uncorrelated to the market. I’m very happy that I am an uncorrelated to the market. I don’t want to be stuck to…when somebody sends out a tweet, the market goes down 10 percent, or a stock goes down ten percent, or President Xi responds to that tweet…I’m going to have to deal with that in a macro-sense. So what we do is, we hyper focus on specific stocks and that’s been very very successful for us over the last five years. We found dozens and dozens. As a matter of fact, a dozen stocks that we have issued short reports on over the last five years have been delisted and gone to zero.

Last year, we had two stocks that are now penny stocks. TechPro Technologies, I presented at Sohn Hong Kong, is now a penny stock. Sino Grandness in Singapore, we talked about two months ago and it dropped 35 percent, so it’s a good time to be a short-seller.

Bernie

My Concern is in these parts you can’t do things necessarily US-style. We don’t have that depth of the market and the rules of engagement are very, very different. Unlike other markets, in these parts, you can actually see a suspension or a halt to active trading of an issue for not days, not months, but years! If for any reason, the regulator or the company itself can call it quits and just pull the stock out of commission and it’ll be frozen, and you’re sitting on non-tradable issues for years at a time. That’s a big risk for players like you.

Dan

Bernie, you bring up a huge problem that has been discussed for the last couple of years. I think we’re going to be see progress on this, but you look Hanenergy, Tianhe, been halted for two years. There’s no reason for it. If you’re investigating a company for two years to decide whether they’re a fraud, they’re probably a fraud. It doesn’t take two years to figure that out and it’s hindering the Hong Kong market.

They understand that and I think that the SFC is taking some good measures going after Standard Chartered and UBS for the China Forestry IPO. I’d like to see a lot more of that. That’s going to be easy money for Hong Kong. They’re going to want to pay those fines. They don’t want individuals to be attached to those fines. So they’ll pay, just like the banks here in the United States pay. As long as nobody gets individually charged, all the big banks here are happy to pay hundreds of millions of fines a year–in fact, they budget it.

Oriel

Ok, and David, quickly before we let you go–what is your top-trade for 2017?

Dan

Well, I’m disclosed, I’m short right now: Car Inc. (699.HK). It’s a secular decline — they’re the Hertz of China, but they got into a business with the related party UCAR who’s competing with Didi and they’ve run into very stiff competition and right now, Beijing and Shanghai, which represent some 70 percent of their business, are saying that all the drivers have to have a local Hukou to drive these vehicles. That’s eighty percent of the drivers in those two markets, and they’re going to lose those drivers. They’re going to lose that business and it’s going to affect 40 percent of Car Inc.’s business for the long-term future. Past that, we have three or four other short trades in the pipeline that’ll be more of the market manipulation and fraud reports.

Oriel

All right Dan, we appreciate your time. Thank you so much for joining us today.