Will the surge of Chinese stocks continue? Morgan Stanley: The recent surge was driven by new buying, and short covering will push the trend higher
AInvestFriday, Oct 4, 2024 3:40 am ET
1min read
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Intelligible Finance learned that since China announced its economic stimulus package, Chinese tech stocks have soared and all signs point to new buying as the main reason. S3 Partners and JPMorgan data showed that short positions in large tech companies such as Alibaba Group (BABA.US), JD.com (JD.US) and Baidu (BIDU.US) have barely changed in recent days. If forced to exit positions, the stock market could rise further.

Nikolaos Panigirtzoglou, strategist at JPMorgan, wrote in a note this week: “The large rise in Chinese ADRs over the past week was mainly due to new buying rather than short covering. Short covering in individual stocks seems to have played a limited role in the Chinese market rise.”

The Hang Seng Technology Index, which tracks 30 Chinese tech companies listed in Hong Kong, has surged more than 45% in less than four weeks, including a record six-day run that ended Wednesday. Companies such as Alibaba, JD.com and Meituan have enjoyed their best trading days in years as investors have gone on a buying spree after China announced stimulus measures. The Shanghai Composite Index rose for a seventh time in eight days on Friday.

Ihor Dusaniwsky, director of predictive analytics at S3, wrote in a report on Oct. 1 that while short sellers suffered mark-to-market losses, they were not rushing to cover their bets. The short position in Alibaba, JD.com and Baidu remained at around 2%-3%. However, Dusaniwsky warned that if the rally continued, there would be “a lot” of short covering, which would further push up the stock price.

“The data is surprising because the magnitude of the rebound usually leads to multiple short covering and forces the shorts to cover in the traditional risk monitoring and control framework,” said Han Piow Liew, fund manager at Maitri Asset Management Pte. “The latest round of stimulus from the Chinese government shows the leadership has a lot of enthusiasm and willingness to turn the situation around.”

Li Sonija, analyst at Morgan Stanley (Hong Kong) Co., said short sellers may have held their positions because they were skeptical about the recent rally. However, in the options market, bulls remain active. Bets on an ETF that tracks Chinese large-cap stocks have risen to near record levels compared with bearish bets after trading in bullish options reached record levels. Alibaba and JD.com are the largest components of the index and have recently witnessed a wave of bullish options trading.

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