China Rally Causes $7B in Losses to Short U.S. Listed Stocks

(Bloomberg) — The dramatic stimulus-fueled rally in Chinese stocks cost traders betting against U.S.-listed stocks about $6.9 billion in market value losses, according to a report by S3 Partners.

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The country’s benchmark CSI 300 rose more than 27 percent from its Sept. 13 threshold, supported by a raft of policy easing measures, while the Nasdaq Golden Dragon index of US-listed Chinese shares rose more than 36 percent . That wiped out about $3.7 billion in year-to-date gains and left the short now about $3.2 billion in paper losses, according to the market research firm.

“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 comeback, however, short sales in the group have slowed, he added.

Before Beijing surprised the market with its stimulus plans, shorting Chinese stocks was a popular strategy, with a number of market watchers underweighting the sector and some even labeling the country “uninvestable”. Just last month, in a global survey of fund managers from Bank of America Corp., 19 percent of respondents said shorting Chinese stocks was the most crowded trade, second only to longs in so-called technology stocks Magnificent Seven.

The most painful deals for short sellers were Alibaba Group Holding Ltd. and JD.com Inc., S3 data showed. On the other hand, traders betting against Nio Inc., Li Auto Inc., XPeng Inc. and PDD Holdings Inc. I’m still in the black.

Even with the recent surge in U.S.-listed Chinese stocks, short sellers are not yet rushing to cover their positions, the data show. However, if the market continues to advance, S3 expects “a significant amount of short covering in the sector” to push share prices even higher.

“BABA’s share price could see the biggest impact if shorts start to cover size, as the stock has seen an increase in short selling in this rally,” Dusaniwsky said. “As short selling no longer offsets some of the long buying pressure in stocks, buy-to-covers alongside long buying can tilt the trajectory if price moves.”

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