(Bloomberg) — The spectacular stimulus-fueled rally in Chinese stocks has cost traders betting against U.S.-listed stocks about $6.9 billion in market value losses, according to a report from S3 Partners.
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The country's benchmark CSI 300 index has risen more than 27% from its Sept. 13 low, supported by a series of policy easing measures, while the Nasdaq Golden Dragon index of U.S.-listed Chinese stocks has up more than 36%. That erased about $3.7 billion in year-to-date gains and left shorts with about $3.2 billion in paper losses, according to the market analysis 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. However, since the rally, short selling in the group has slowed, he added.
Before Beijing surprised the market with its stimulus plans, shorting Chinese stocks had been a popular strategy, with several market observers underestimating the sector, with some even calling the country “uninvestable.” Just last month, in a survey of global money managers by Bank of America Corp., 19% of respondents said shorting Chinese stocks was the most crowded trade, second only to long positions in so-called technology stocks. Magnificent Seven.
The most painful trades for short sellers have been Alibaba Group Holding Ltd. and JD.com Inc., S3 data shows. On the other hand, traders betting against Nio Inc., Li Auto Inc., XPeng Inc. and PDD Holdings Inc. are still in the black.
Even with the recent rally in U.S.-listed Chinese stocks, short sellers are not rushing to cover their positions yet, data shows. Still, 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 take the biggest hit if short positions begin to cover their size, as the stock has seen increased short selling in this rally,” Dusaniwsky said. “With short selling no longer offsetting some of the long-term buying pressure on the stock, buying to cover alongside long-term buying can steepen the trajectory if its price moves.”
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