China’s Tech Crackdown Yields Profits for Short Sellers

Short sellers of U.S.-listed Chinese companies have made almost $8 billion in July, with one quarter of the gains coming from Alibaba.

(Qilai Shen/Bloomberg)

(Qilai Shen/Bloomberg)

China’s crackdown on highflying technology companies that trade in the U.S. is creating a feast for short sellers.

Short sellers of U.S.-listed Hong Kong and Chinese stocks are up almost $8 billion this year, with the bulk of that earned in July, according to a new report from S3 Partners, which tracks the business.

Almost one quarter of those gains came from one stock: Jack Ma’s Alibaba Group, the internet giant.

From July 1 to July 27, short sellers booked $1.99 billion in marked-to-market gains in Alibaba, net of financing costs, according to the report. That was a nearly 20 percent gain. Over the entire year, short sellers have made $1.34 billion shorting Alibaba for a 13 percent gain, the report said.

Alibaba was the first to feel the heat of the Chinese government, when it canceled the initial public offering of Alibaba’s Ant Group subsidiary last November. The stock has been on the decline ever since then.

On Tuesday, Alibaba reported that quarterly earnings had fallen, despite an uptick in sales — the latest in a series of bad news from the company. In May, it paid a record $2.8 billion fine after Beijing accused it of acting like a monopoly.

Alibaba also holds the title for the biggest U.S.-listed Chinese short.

There is $10 billion of short interest in Alibaba alone, which amounts to more than one quarter of the total short interest of $38.4 billion in these stocks, according to the S3 Partners report.

The next biggest short was in Chinese online grocer Pinduoduo, with $1.24 billion in marked-to-market gains in July, or a 44 percent monthly increase. During the entire year, shorts have booked $1.38 billion on Pinduoduo, a nearly 42 percent gain.

Short sellers of U.S. listed Chinese stocks, “have been riding a roller coaster of price moves recently,” said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners and author of the report.

On Tuesday, for example, his report noted that the Invesco Golden Dragon China ETF, which tracks the NASDAQ index of U.S.-listed Chinese companies, fell more than 3 percent on fears that the gaming industry would be next to incur the wrath of the Chinese Communist Party after a Chinese state media article described online games as “spiritual opium.”

Chinese stocks have already been hit by increased regulatory scrutiny in the e-commerce, internet, and after-school education sectors. As of July 27, the Golden Dragon China ETF was down nearly 29 percent for the month, when the underlying stocks began to rebound, S3 Partners said.

Last month, short sellers found their biggest percentage gains in the education sector, after Chinese regulators announced they would ban education firms from making profits, raising capital, or going public.

TAL Education Group shorts made $656 million alone, for a monthly gain of 123 percent. TAL was followed by Gaotu Techedu (formerly known as GSX), where shorts booked $371 million in marked-to-market profits, for a 113 percent gain.

New Oriental Education and Technology Group shorts were up 102 percent in July, gaining $323 million.

Other well-known Chinese stocks that were winners for shorts in July were Baidu, where shorts made $356 million, a 25 percent gain, and, where the shorts made $409 million, or 21 percent.

While shorts were cleaning up on Chinese stocks, they weren’t adding significantly to their positions. A “meager” $94 million of added short selling in Chinese stocks occurred over the past 30 days, S3 Partners reported.

All of the gains are marked to market, after financing costs are deducted.