19 Jul, 2012
How Short-sellers Reap Huge Profits From ‘Hunting’ Chinese Companies
(People’s Daily Online), July 18, 2012 – Overseas-listed Chinese companies have been suffering from short selling in the past two years. The Chinese concepts stocks listed in the United States have been frequent targets of short-selling funds. By spreading rumors about Chinese companies’ “poor management” and “suspicious accounting,” these funds first drive a stock’s price down, and then capitalize on the expected decline in the stock’s price.
Share prices plunge due to short selling.
Short-sellers recently targeted Evergrande Real Estate Group, the second largest real estate developer in China. On June 21, professional U.S. short-seller Citron Research published a 57-page report accusing Evergrande of using accounting tricks and bribes to hide the fact that it is truly insolvent. Evergrande’s share price tumbled immediately after the publication of the report, and the company’s market value shrank by over 7.6 billion yuan. Trading volume increased 12-fold on June 21 from the previous trading day, of which, the volume of short sales increased nearly 30-fold. Evergrande’s share price continued to fluctuate sharply and closed lower on June 22, falling nearly 15 percent in just two days.
Many other Chinese companies have also suffered from short selling. Unfounded allegations against Chinese companies listed in North America by Carson Block, founder of Muddy Waters Research, John Hempton, chief investment officer at Australian money manager Bronte Capital, and other short-sellers had been the catalyst that had wiped more than 21 billion U.S. dollars off the market value of these overseas-listed Chinese companies, Reuters reported last year.
U.S. short-sellers have pushed the prices of most Chinese concepts stocks down, with 39 concepts stocks facing delisting risk and over 10 stocks planning to delist.
Muddy Waters Research and other short-selling institutions have reaped huge profits from shorting the stocks of several U.S.-listed Chinese companies such as Sino-Forest and Orient Paper.
“More and more domestic companies are listing overseas amid China’s economic rise. The short-selling mechanism in U.S. capital markets makes it possible for certain institutions to reap huge profits by deliberately belittling or slandering Chinese companies,” said senior economist Sun Fei.
“This (short selling) has been making more money than you can imagine,” said John Bird, a broker at American online discount brokerage Firstrade.
Average short interest in about 80 Chinese companies traded on U.S. exchanges has risen sharply in 2011, rising from nearly 4 percent on Jan. 3, the first trading day of the year, to nearly 6 percent as of June 13, according to data provided by Data Explorers.
Sun said that the majority of U.S.-listed Chinese companies are operating honestly, though a few Chinese companies have committed frauds and become vulnerable to short-sellers’ allegations.
Industry insiders noted that due to the differences in Chinese and U.S. national conditions and accounting systems, certain U.S.-listed Chinese companies have loopholes, thereby becoming easy targets of short-sellers.
Experts said that, in order to effectively deal with the short selling, Chinese enterprises listed in foreign countries should operate honestly, develop steadily and make efforts to increase returns to their investors. They must use market-based measures to fight back evil short selling actions. Meanwhile, they must also strengthen their information communications with their overseas investors and improve numbers and qualities of their information issuances.
Sun believes that, as Chinese enterprises listed in foreign countries are increasing, deceptions indeed exist in some of these enterprises. Therefore, considering that deceptions may also exist in other Chinese enterprises, the United States has made some reports.
In this case, honest and righteous Chinese enterprises must use the weapon of the law to fight back bravely and deal with the short selling actively. Meanwhile, they must also obey local laws, improve their qualities and profits, try hard to grow stronger, and be able to withstand market tests, said Sun.
An expert from the Institute of Finance and Banking under the Chinese Academy of Social Sciences Xie Hui said that the short selling mechanism and class action system are important market supervision forces in international capital markets. Because of them, all market participators have the right to supervise listed companies. Therefore, in international capital markets, especially in U.S. and European capital markets, listed companies dare not cheat.
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