The recent rally in Chinese stocks, driven by Beijing's aggressive stimulus measures, has inflicted significant losses on traders who bet against U.S.-listed Chinese companies. According to a report by S3 Partners, short sellers have faced a staggering $6.9 billion in mark-to-market losses as Chinese equities have surged in recent weeks. This follows a sharp recovery in China's CSI 300 Index, which has climbed more than 27% since mid-September, while the Nasdaq Golden Dragon Index, which tracks U.S.-listed Chinese stocks, has soared over 36%.
The unexpected rebound has reversed many of the gains short sellers accumulated earlier this year. Prior to the rally, shorting Chinese equities was a highly profitable strategy, especially as pessimism surrounding the Chinese economy intensified. Traders had been positioning against Chinese stocks as growth in the world's second-largest economy faltered and Beijing struggled with various internal challenges. However, Beijing's sudden shift toward policy easing, including stimulus efforts to shore up the economy, caught many investors off guard.
Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, noted that short sellers were building profitable positions as the Chinese market declined earlier in the year. "Before the rebound, shorting Chinese stocks was the trade to be in," Dusaniwsky said in the report. But the recent surge has slowed short-selling activity as traders have become more cautious.
The pain has been particularly acute for those betting against major Chinese companies like Alibaba Group Holding Ltd. and JD.com Inc., which have been among the hardest hit for short sellers. Alibaba, in particular, has experienced significant short interest, and if the rally continues, S3 Partners expects substantial short covering that could drive the stock's price even higher. Dusaniwsky explained, "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. Buy-to-cover orders alongside long buying may steepen the trajectory of its price movement."
Despite these substantial losses, not all short sellers are in retreat. Many traders are holding firm, waiting to see if the recent rally will hold. Those who bet against companies such as Nio Inc., Li Auto Inc., XPeng Inc., and PDD Holdings Inc. have managed to stay in the black, even as broader Chinese markets rally. For now, the data suggest that short covering has not yet occurred on a large scale, but that could change if the upward momentum continues.
The backdrop to this rally has been China's broader economic struggles. Earlier this year, many analysts and investors had declared Chinese stocks "uninvestable" due to a combination of slow growth, rising debt, and geopolitical tensions. In a global fund manager survey by Bank of America conducted just last month, nearly 20% of respondents labeled shorting Chinese equities as the most crowded trade, second only to going long on U.S. technology stocks.
However, Beijing's unexpected pivot toward policy easing has upended the narrative. The Chinese government has introduced a series of measures aimed at stimulating growth, including cuts to interest rates and steps to encourage consumer spending. These moves have bolstered investor confidence and fueled the recent market surge. As a result, some investors who were betting on further declines in Chinese stocks have been forced to reconsider their positions.
For now, short sellers are cautiously monitoring the situation. While the recent rally has caused substantial losses, many traders are waiting for more signals before deciding whether to cover their short positions. Analysts warn that if the market continues to rise, a wave of short covering could follow, which would push stock prices even higher.
