Shorts lose nearly $7bn! Nasdaq Dragon Index soars over 36% Shorts covering could further push Chinese stocks

Zhitong Finance APP noticed that a report from S3 Partners showed that the sharp rise in China's stock market, driven by stimulus policies, has wiped out about $6.9bn in market value for short sellers of Chinese stocks.

The benchmark CSI 300 index in China has risen more than 27 per cent from its low on September 13, while the Nasdaq Golden Dragon index of Chinese stocks listed in the US has soared more than 36 per cent, erasing about $3.7bn in profits for short sellers this year, according to the market analysis firm, which said the short sellers now face a $3.2bn loss on their books.

Ihor Dusaniwsky, general manager of predictive analytics at S3, said in the report: “Shorts were making money on the downturn before the recent rebound.” However, he added that short selling in the sector had slowed since the rebound.

Shorting Chinese stocks had been a popular strategy before the government's surprise stimulus package, with many market observers bearish on Chinese stocks and some believing China was “not worth investing in”. Just last month, 19 per cent of respondents to Bank of America's global fund manager survey said shorting Chinese stocks was the most crowded trade, behind buying the so-called seven big techs.

Alibaba and JD.com were the most painful for short sellers, according to S3, while short sellers of Nio, Li Auto, XPeng and PDD Holdings were still making money.

Despite the recent rebound in Chinese stocks listed in the US, short sellers have not been rushing to cover their positions, but S3 expects “a significant amount of short covering” to further push up prices if the market continues to rise.

Dusaniwsky said: “If shorts start to cover in large amounts, Alibaba's stock price could be most affected as shorting activity increased during the rebound. With shorting no longer able to offset some of the buying pressure, a combination of buying covering and buying could make the stock price move steeper if there is any volatility.”