Short-selling eases as Block loses interest

PUBLISHED : Thursday, 29 November, 2012, 12:00am
UPDATED : Thursday, 29 November, 2012, 3:46am

Carson Block says it's become too difficult to short Chinese equities in the US as bets on stock declines drop by 50 per cent from a year ago.

Block, known for his allegations that Chinese companies traded in North America engaged in accounting fraud, said in an interview on Tuesday that he's lost interest in betting against the stocks because the government helps protect them.

Short interest in the 83 biggest Chinese firms listed in New York has dropped to an average 2.61 per cent of the total outstanding, from 5.22 per cent a year ago.

Short sellers, who sell securities they don't own to buy them later at a lower price, are retreating as China limits access to corporate filings and companies such as Focus Media Holding try to withdraw from the market through buyouts.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the US has climbed 1.5 per cent this year and Focus Media, which Block's Muddy Waters targeted last year, has reversed losses to gain 22 per cent in 2012.

"Investors will be more comfortable knowing that the threat of short-seller attacks is a lot less than it used to be and a lot of companies have stepped up their corporate governance," said Kevin Pollack, a managing director at Paragon Capital in New York, which invests in Chinese stocks.

"The fact a guy like Carson Block isn't aggressively shorting companies hopefully will lead to more investor interest that otherwise would have been scared away," he said.

Block, a 36-year-old lawyer, became the face of the short-sellers against overseas traded Chinese companies last year after his report accusing Sino-Forest of overstating its plantation assets prompted the shares to slump 74 per cent.

Sino-Forest filed for bankruptcy protection in March, wiping out US$3 billion in value.

Muddy Waters then switched focus to New Oriental Education & Technology Group and Focus Media.

Their shares have all rebounded after initial slumps when Block questioned their accounting. Both companies have denied any wrongdoing.