China's rally causes $7 billion loss for short sellers of US-listed stocks

The dramatic stimulus-driven rally in Chinese stocks left traders that shorted US-listed shares reeling, according to a report from S3 Partners, with mark-to-market losses running at around $6.9 billion.

Since hitting a Sept. 13 low, China's main CSI 300 index has surged more than 27 per cent to reclaim some of its lost ground, while the Nasdaq Golden Dragon index of US-listed Chinese stocks has leapt by more than 36 per cent. According to the market analytics firm, this has wiped away about $3.7 billion in year-to-date profits and left shorts now nursing around $3.2 billion in paper losses.

“Prior to the recent rally short sellers were profitably building their positions in a falling market,” Ihor Dusaniwsky, managing director of predictive analytics at S3, said in the report. Since the rebound, however, short selling in the group has slowed, he said.

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Shorting Chinese stocks was all the rage before Beijing threw a curve ball at the markets with its stimulus policies, with several market observers underweighting the sector, and some even labelling the country “uninvestable.”

Just last month, in a global fund manager survey conducted by Bank of America Corp., 19 per cent said that the most crowded trade was shorting Chinese equities, second only to going long the so-called Magnificent Seven technology stocks.

Based on S3, Alibaba Group Holding Ltd. and JD.com Inc. were the biggest hurt to the short sellers. Conversely, traders betting against Nio Inc., Li Auto Inc., XPeng Inc., and PDD Holdings Inc. are still in the black.

The data show that despite the recent rebound in US-listed Chinese equities, short sellers aren't backpedalling yet. However, if the trend continues upward, S3 expects “a significant amount of short covering in the sector” to push stock prices even higher.

“BABA’s stock price might see the greatest impact if shorts begin covering in size as the stock has seen increased short selling into this rally,” Dusaniwsky said. “With short selling no longer offsetting some of the long buying pressure in the stock, buy-to-covers side-by-side with long buying may steepen the trajectory if its price moves.”