The recent surge in Chinese stocks has wiped out all the gains made by short sellers on US-listed Chinese stocks this year. Analysts suggest that short covering and additional long buying could further steepen the rally.
According to a report by market analysis firm S3 Partners, the rebound in Chinese stocks, driven by stimulus measures, has resulted in losses of approximately $6.9 billion for traders shorting US-listed Chinese stocks. Supported by a series of policy easing measures, China's benchmark CSI 300 Index has risen more than 27% from its low on September 13, while the NASDAQ Golden Dragon China Index, which tracks Chinese stocks listed in the US, has soared over 36%.
S3 Partners' data indicates that this significant gain has erased about $3.7 billion in profits short sellers had accumulated this year and has now led to approximately $3.2 billion in unrealized losses. Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, mentioned that short sellers had profited from establishing positions in a declining market prior to the recent rally. However, the pace of shorting has slowed since the rebound began.
Shorting Chinese stocks was a popular strategy before China unexpectedly introduced a combination of stimulus policies. Just last month, a survey by Bank of America Corp. of global fund managers found that 19% of respondents considered shorting Chinese stocks to be the most crowded trade, second only to going long on the so-called "Magnificent Seven" tech stocks.
The data from S3 Partners revealed that the most painful trades for short sellers were betting against Alibaba Group (BABA, Financial) and JD.com (JD). On the other hand, traders shorting NIO (NIO), Li Auto (LI), XPeng (XPEV), and Pinduoduo (PDD) have still been making profits.
Despite the recent rebound in US-listed Chinese stocks, short sellers have not been in a rush to cover their positions. However, if the market continues to rise, S3 Partners expects significant short covering in Chinese stocks, which could further drive up stock prices.
Dusaniwsky noted that if short sellers start covering their positions, Alibaba's (BABA, Financial) stock might be the most affected, as it was heavily shorted before the rebound. The combination of short covering and long buying could intensify the upward momentum if stock prices fluctuate.
