There has been continued short selling in Chinese and Hong Kong stocks trading on the U.S. exchanges since the Coronavirus was confirmed on January 20th. Both the Hang Seng and CSI 300 Indexes have traded down since human-to-human transmission of Short sellers have been active. Since the 20th, we have seen $751 million of new shares shorted in the 494 U.S. traded Chinese\Hong Kong securities we track, bringing total short interest in these domestically traded securities to $27.27 billion.
Not surprising, the vast majority of the new short selling occurred in ETFs. Of the twenty-three actively traded Chinese\Hong Kong ETF’s that we track, there are eight with short interest over $10 million. Overall, ETF shares shorted increased by $815 million, bringing total Chinese\Hong Kong ETF short interest to $3.75 billion.
We have seen significant increased short selling in the FXI, MCHI, KWEB and YANG ETFs while short covering in the EWH ETF. There has been a reallocation and increase of short exposure in the China based ETFs and decrease in the Hong Kong based ETFs. The 28% increase in short selling in these Chinese\Hong Kong regional ETFs highlights the efforts of investors and portfolio managers of attempting to hedge some of the Coronavirus risk out of their holdings.
Interestingly, we saw almost twice the amount of new short selling in the broader market MCHI ETF than the narrow large cap FXI ETF. Traders seem to be looking for broader risk diversification in their hedge rather than getting short exposure to just a handful of the largest cap stocks in the FTSE China 50 Index. By shorting the MCHI investors are getting short exposure to almost 600 securities versus just 50 in the FXI. Investors are anticipating that the economic impact of the virus may be far more wide reaching in the Chinese economy and not limited to just the largest companies in the region and shorting the MCHI will reflect the effect of the Coronavirus on multiple economic sectors and geographic provinces in China.
In contrast with the large amount of net short selling in Chinese\Hong Kong based ETF products we saw a net decrease in short selling on the equity side. On a net basis, there was $64 million worth of short covering in domestically traded Chinese\Hong Kong based stocks, although there are specific stocks that had significant individual increases and decreases in shares shorted. Again, this is a reflection of demand in a wider based regional hedge rather than targeting specific stocks as portfolio hedges.
On the equity side, the U.S. traded Chinese\Hong Kong stocks with the largest amount of new short selling were:
Only two stocks had over $100 million in incremental short selling between January 20th and February 12th. Trip.com (TCOM) and Luckin Coffee (LK) are both stocks that would be directly affected by the quarantine as travel and retail sales will be negatively affected by the restriction of movement in the affected provinces.
There was significant short covering in some of the more shorted U.S. traded Chinese\Hong Kong Stocks, with three securities with short covering worth over $100 million since January 20th. New “buy-to-cover” activity was more than enough to offset new equity short selling.
The vast majority of securities with short covering were internet based. The top five stocks with the largest decrease in shares shorted were an online direct retail seller (JD); an internet search engine (BIDU); a video entertainment services provider (IQ); an internet technology provider (NTES) and an online entertainment services provider (BILI). With Chinese citizens prevented or reluctant to travel outside their homes, internet services should see a surge in activity.
Overall, short sellers of domestically traded Chinese\Hong Kong Stocks were profitable with a mark-to-market gain of +$525 million, +2.02%. But with the CSI 300 down -5.05% and Hang Seng down -3.38% they still underperformed the overall Chinese\Hong Kong markets. Even in a down market, short sellers needed to pick and choose their trades wisely. Below are the most and least profitable shorts, net of stock borrow financing, from January 20th to February 12th.
We expect continued short selling in the Chinese\Hong Kong sector and that short activity to occur primarily in the U.S. market as Chinese regulatory agencies limit shorts selling activity on their own exchanges. Travel, food retail, and brick & mortar retailers should continue to feel the brunt of the short selling activity as they are more directly affected by the decrease in mobility in the region. On the other hand, internet related securities should see continued short covering as home-bound user’s increased traffic flow should produce an upswing in short-term revenues.
The $751 million of new short selling we have seen in the first three weeks of the Coronavirus pandemic represents just a 3% increase in over-all domestic short interest in the sector. If the effects of the virus continues to grow we should see increased short selling in a broader range of securities as more companies begin to feel the effect of reduced consumer demand.
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Managing Director Predictive Analytics, S3 Partners, LLC
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