Recently, Chinese technology stocks have experienced a significant surge following the announcement of economic stimulus policies by the Chinese government. New buying activity has been identified as the primary driver of this growth, according to data from S3 Partners and JPMorgan.
American Depositary Receipts (ADRs) of major Chinese tech companies like Alibaba (BABA, Financial), JD.com (JD), and Baidu (BIDU) have seen little change in short positions, suggesting that short covering has not been a major factor in the recent market rally. JPMorgan strategist Nikolaos Panigirtzoglou noted that the significant rise in Chinese ADRs over the past week is largely attributed to new buying rather than short covering.
The Hang Seng Tech Index, which tracks 30 Chinese tech companies listed in Hong Kong, has soared over 45% in less than a month, with record gains seen over a six-day period. Companies including Alibaba (BABA, Financial), JD.com (JD), and Meituan have experienced some of their best trading days in years as investors rush to buy following China's economic measures.
Despite the valuation losses faced by short sellers, they have not been quick to cover their positions. Short interest in Alibaba (BABA, Financial), JD.com (JD), and Baidu (BIDU) has remained between 2% to 3%. However, S3's Ihor Dusaniwsky warns that if the upward trend continues, significant short covering could occur, potentially driving prices even higher.
Han Piow Liew, a fund manager at Maitri Asset Management, remarked that the recent data is surprising as such rebounds typically lead to multiple rounds of short covering, forcing sellers to close their positions. This indicates strong governmental commitment to reversing economic conditions.
Analysts like Morgan Stanley’s Sonija Li suggest that some short sellers may remain skeptical of the recent rally. Meanwhile, the options market remains active, with bullish options hitting record levels. Bets on a U.S.-listed ETF tracking Chinese large-cap stocks have reached historic highs in favor of an upward trend, with Alibaba (BABA, Financial) and JD.com (JD) being major components driving this activity.
