(Bloomberg) — The dramatic stimulus-driven rally in Chinese stocks has cost traders betting on U.S. listed stocks about $6.9 billion in mark-to-market losses, according to a report from S3 Partners.
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The country’s CSI 300 index has risen more than 27% since its September 13 low, buoyed by a series of easing measures, while the Nasdaq Golden Dragon index of US-listed Chinese stocks has risen more than 36%. That has wiped out about $3.7 billion in gains so far this year, according to the market analysis firm, and is now leaving shorts with about $3.2 billion in paper losses.
“Prior to the recent rally, short sellers were profitably building their positions in a bear market,” Ihor Dusaniwsky, director of predictive analytics at S3, said in the report. However, since the recovery, 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 some market observers underweight the sector, and some even labeling the country as ‘uninvestable’. Just last month, 19% of respondents in a global fund manager survey from Bank of America Corp. said. that shorting Chinese stocks was the most popular trade, after going long the so-called Magnificent Seven technology stocks.
The most painful trades for short sellers were Alibaba Group Holding Ltd. and JD.com Inc., S3 data shows. On the other side are traders who bet against Nio Inc., Li Auto Inc., XPeng Inc. and PDD Holdings Inc. still in black.
Even with the recent rally in US-listed Chinese stocks, short sellers are not rushing to cover their positions, the data shows. Still, S3 expects that, if the market continues to develop, “a significant amount of short covering in the sector” will drive share prices even higher.
“BABA’s stock price could see the biggest impact if shorts start to cover their size as the stock sees more short selling during this rally,” Dusaniwsky said. “With short selling no longer offsetting some of the long buying pressure in the stock, buy-to-covers in addition to long buying could steepen the trajectory as the price moves.”
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