Beijing finally gives China shorts a helping hand

The life of China bear traders looks set to get harder

  
A person types on a laptop computer in Manhattan, New York City, U.S., September 11, 2020. Image used for illustrative purpose.

A person types on a laptop computer in Manhattan, New York City, U.S., September 11, 2020. Image used for illustrative purpose.

REUTERS/Andrew Kelly

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

HONG KONG - Beijing has given China shorts a helping hand. The collapse of U.S.-based hedge fund Archegos Capital and central government crackdowns have delivered selective relief to investors attacking Chinese shares in New York. They should be cautious: patriotic reinforcements are on the way.

In 2011, short sellers like Carson Block of Muddy Waters and Andrew Left of Citron Research made vast profits publishing negative reports about dodgy accounting practices among Chinese companies that had listed in the United States.

Their job got harder as targets learned the art of the squeeze, in which traders push up the price of a heavily shorted security, forcing investors to exit positions to cut losses. They were assisted by Chinese cash that has quietly poured into American equities through an official programme which has issued $147 billion in quota and through illicit routes. The Rhodium Group estimates Chinese investors held $700 billion of U.S. stocks in 2020, three times official figures.

This explains how Chinese stocks often manage to post big rallies soon after being attacked. Block called education technology firm GSX a near total fraud on May 18, 2020, having taken a position at $35 per share. GSX denied the allegations, and the shares rocketed up 331% in 57 days. The company has since renamed itself Gaotu Techedu. A similar attack on Luckin Coffee set off a 32% rally over two weeks.

Both trades paid off in the end, but not because the market was convinced by sceptical reports. Luckin admitted to fabricating sales – although the short furore may have convinced the auditor to apply pressure. As for GSX, its value nosedived when Archegos started desperately unwinding short-squeezing positions. Beijing greased the slide with its attempt to rein in the private tutoring industry, which knocked down relatives TAL Education, Hailiang Education and Joyy, another Block target.

Yet a Breakingviews analysis of 25 popular Chinese short targets shows resilience. Some have taken hits, but as a group they have outperformed the S&P 500 over the last 12 months: Used-car app Uxin UXIN.O is up 494% this year, for example.

Now Beijing officials, seeking to keep the yuan from overheating, are handing out fresh quota to let more money flow overseas. The life of China bear traders looks set to get harder.

CONTEXT NEWS

- New York-listed Chinese online education provider Gaotu Techedu, earlier known as GSX Techedu, has seen its stock price fall 70% year-to-date amid short-seller reports alleging it inflated student numbers. The company renamed itself in April and changed its stock ticker to GOTU from GSX.

- GSX denied the allegations.

- Shares in other Chinese education-related firms have broadly declined over the past year as Beijing has moved to tighten regulation of the entire sector.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | Editing by Una Galani and Katrina Hamlin) ((pete.sweeney@thomsonreuters.com; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net))


More From Equities