The surge in Chinese stocks driven by stimulus measures has led to significant losses for traders shorting US-listed Chinese shares. According to a report from S3 Partners, these traders have incurred approximately $6.9 billion in mark-to-market losses due to the rally.
The CSI 300 index in China has climbed more than 27% from its low point in September, while the Nasdaq Golden Dragon index of US-listed Chinese stocks has seen a more than 36% increase. This rally has erased around $3.7 billion in year-to-date gains for short sellers, leaving them with approximately $3.2 billion in paper losses.
Ihor Dusaniwsky, managing director of predictive analytics at S3, noted that prior to the rally, short sellers were profiting as the market declined. However, since the rebound, short selling activity in the sector has slowed down.
Shorting Chinese stocks was a popular strategy before Beijing’s announcement of stimulus plans, with many market observers avoiding the sector altogether. In a recent Bank of America Corp. survey, 19% of respondents identified shorting Chinese equities as the most crowded trade, second only to investing in technology stocks.
The most challenging trades for short sellers have been Alibaba Group Holding Ltd. and JD.com Inc., while those shorting Nio Inc., Li Auto Inc., XPeng Inc. and PDD Holdings Inc. are still seeing profits.
Despite the recent rally, short sellers are not rushing to cover their positions. However, if the market continues to climb, S3 anticipates a significant amount of short covering in the sector, which could further drive up stock prices.
Dusaniwsky highlighted that Alibaba’s stock price could be heavily impacted if shorts start covering their positions, as increased short selling during the rally has added pressure. With short selling no longer counteracting long buying pressure, a surge in buy-to-cover activities alongside long buying could push the stock price higher.
Overall, the rally in US-listed Chinese equities has reshaped the market landscape for short sellers, who may need to reassess their strategies in light of the ongoing momentum.
