China Rally Spurs $7 Billion Loss for Shorts of US-Listed Stocks

The dramatic stimulus-fueled rally in Chinese stocks has cost traders betting against US-listed shares roughly $6.9 billion in mark-to-market losses, according to a report from S3 Partners.

The country’s benchmark CSI 300 index has risen more than 27% from its Sept. 13 trough, supported by a spate of policy-easing measures, while the Nasdaq Golden Dragon index of US-listed Chinese stocks has surged more than 36%. That’s erased about $3.7 billion in year-to-date gains, and left shorts now nursing around $3.2 billion in paper losses, according to the market analytics firm.

“Prior to the recent rally short sellers were profitably building their positions in a falling market,” Ihor Dusaniwsky, managing director of predictive analytics at S3, said in the report. Since the rebound, however, 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 a number of market observers underweighting the sector, and some even labeling the country “uninvestable.” Just last month in a Bank of America Corp. global fund manager survey, 19% respondents said that shorting Chinese equities was the most crowded trade, second only to going long the so-called Magnificent Seven technology stocks.

The most painful trades for short sellers have been Alibaba Group Holding Ltd. and JD.com Inc., S3 data show. On the flip side, traders betting against Nio Inc., Li Auto Inc., XPeng Inc. and PDD Holdings Inc. are still in the black.

Even with the recent rally in US-listed Chinese equities, short sellers aren’t rushing to cover their positions just yet, the data show. Still, if the market continues to advance, S3 expects “a significant amount of short covering in the sector” to push stock prices even higher.

“BABA’s stock price might see the greatest impact if shorts begin covering in size as the stock has seen increased short selling into this rally,” Dusaniwsky said. “With short selling no longer offsetting some of the long buying pressure in the stock, buy-to-covers side-by-side with long buying may steepen the trajectory if its price moves.”