(Bloomberg) — Chinese technology stocks have staged a huge rally since the country announced its stimulus wave. And this time it can be real.
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Short positions on American Depositary Receipts of major companies including Alibaba Group Holding Ltd., JD.com Inc. and Baidu Inc. have not changed dramatically in recent days, according to S3 Partners and JPMorgan Chase & Co. That could be good news for the market.
“The sharp rally in Chinese ADRs over the past week is mainly due to new buying rather than short covering,” JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou wrote in a note this week. “Short hedging in individual stocks appears to have played only a modest role in the Chinese stock rally.”
The Hang Seng Tech Index, which tracks 30 Chinese technology companies listed in Hong Kong, has risen more than 45% in less than four weeks, including a record rise in the six days to Wednesday. Alibaba, JD.com and food delivery company Meituan were among those who had some of their best trading days in years as investors went into a buying spree after the Chinese government announced measures to stimulate its troubled domestic economy.
Although short sellers have suffered mark-to-market losses, there has been no rush to cover bearish bets, Ihor Dusaniwsky, director of predictive analytics for S3, wrote in an Oct. 1 report. Short interest for Alibaba, JD.com and Baidu remained around 2% to 3% of available shares.
“The data is surprising because the size of the rebound would normally cause shorts to be wiped out and forcibly hedged many times over in a traditional risk monitoring and control framework,” said Han Piow Liew, fund manager at Maitri Asset Management Pte. “The latest round of stimulus measures by the Chinese government shows that the leadership has great zeal and intent to turn things around.”
Chinese technology shares have had difficult years. As the country’s economy weakened, the government’s crackdown on the sector and fierce e-commerce competition hurt the results of the companies that were once the market’s darlings.
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Short sellers holding on to their positions may be doing so because they are skeptical about the recent rally, said Sonija Li, an analyst at MIB Securities Hong Kong Ltd. Chelsey Tam of Morningstar Inc. notes that the “consumer downtrading trend” is still pronounced in sectors such as e-commerce, travel and food delivery.
Still, the bulls in the options market are alive and well. Bets on profits on a US listed fund that tracks large-cap Chinese stocks are near the most expensive ever compared to bearish bets after record trading. Alibaba’s and JD.com — companies that have seen a burst of bullish options trading recently — are among its largest components.
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