China's stock market euphoria has wiped out all of this year's gains for short-sellers of Chinese concept stocks listed in the U.S. Analysts say that short-covering and long buying could make the rally steeper.
A significant rebound in China's stock market, driven by stimulus measures, has resulted in losses of about $6.9 billion for traders shorting Chinese concept stocks listed in the U.S., according to a report from market analysis firm S3 Partners.
Supported by a series of policy easing measures, China's benchmark CSI 300 Index has risen by more than 27% from its low on September 13th, while the Nasdaq Golden Dragon China Index, which tracks the performance of Chinese concept stocks, has soared by more than 36%.
Data from S3 Partners shows that this astonishing surge has erased about $3.7 billion in gains for Chinese concept stock short-sellers this year, and they are currently facing paper losses of about $3.2 billion.
Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3 Partners, said in the report, "Before the recent rebound, short-sellers profited from establishing positions in the falling market." However, he added that the pace of short-selling has slowed since the rebound.
Prior to China's unexpected combination of stimulus policies, shorting Chinese stocks had been a popular strategy, with many market observers reducing their holdings in Chinese equities.
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Just last month, in a survey of global fund managers conducted by Bank of America, 19% of respondents indicated that shorting Chinese stocks was the most crowded trade, second only to going long on the so-called "Magnificent Seven" technology stocks.
According to S3 Partners' data, the most painful trades for short-sellers were shorting Alibaba Group and JD.com. On the other hand, traders shorting NIO, Li Auto, XPeng, and Pinduoduo are still in profit.
The data also shows that despite the recent rebound in Chinese stocks listed in the U.S., short-sellers are not yet in a hurry to cover their positions. However, if the market continues to rise, S3 Partners expects "a significant short-covering" in Chinese concept stocks to push stock prices even higher.
Dusaniwsky said, "If short-sellers start to cover their positions, Alibaba's stock price may be the most affected, as the stock was more heavily shorted before this rebound. With short-sellers no longer offsetting some of the bullish buying pressure in the stock, if the stock price fluctuates, short-covering and long buying could make the rally steeper."
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