China stock bears push short bets to record high as tech clampdown, policy tightening and Huarong add to CICC’s five sell signals

China stock bears have driven up short bets to an all-time high this week, reflecting demand for hedging against the risks of policy tightening and further fallout from the nation’s antitrust crackdown on technology companies.

The combined value of stock shorts on the Shanghai and Shenzhen stock exchanges climbed to 152 billion yuan (US$23.4 billion) on Tuesday, according to data published by state agency China Securities Finance. That’s the highest since local brokerages were allowed to officially start securities lending and borrowing in 2010.

The bearish bets came after China’s economic growth accelerated to 18.3 per cent in the first quarter in a full recovery from the pandemic, raising expectations that policymakers will further put the brakes on excessive credit expansion.

Since late last year, Beijing has also been stepping up its scrutiny of Internet-platform operators. A months-long probe into anti-monopoly practices culminated this month in a record US$2.8 billion fine being imposed on e-commerce group Alibaba Group Holding, which is also the owner of this newspaper.

“There are near-term risks in China including an anti-monopoly drive that threatens large-cap Internet companies that push us to favour more cyclical and domestically oriented exposures,” strategists including Wei Li at BlackRock wrote in a report on April 19. BlackRock manages about US$8.7 trillion globally.

Stock watchers are also following the unfolding distress at bad-loan manager China Huarong Asset Management, whose dollar-denominated bonds plunged over the past three weeks amid a cash crunch and speculation about a debt restructuring.

The poor view of the market follows an April 12 quant strategy report by analysts at China International Capital Corp, which said its technical and timing indicators on five local stock benchmarks have started flashing “sell” signals since late March and early April.

“We expect the market to enter a phase of bottom building and range-bound trading considering softening market sentiment and inadequate market momentum,” they said in the report. The firm did not reply to an email seeking comment.

The CSI 300 Index, which tracks the biggest companies listed on both exchanges, has declined 12.4 per cent since reaching this year’s high on February 10.

While the bearish bets reached an unprecedented level, the amount is small compared with the level of margin trading. The latest outstanding value of leveraged bets amounted to 1.52 trillion yuan. They are also paltry relative to the US$11.1 trillion of capitalisation of more than 5,000 listed companies on both exchanges, according to Bloomberg data.

Some major shareholders of a slew of companies have recently agreed to lend their shares to China Securities Finance, a state-backed agency to aid brokerages’ leveraged trading and short-selling businesses, adding to the supply of stocks that can be shorted.

The biggest shareholder of Shanghai International Airport said earlier this month it planned to lend as many as 43 million shares, or a 2.23 per cent stake, to the agency. Its stock has slumped 36 per cent from a record high set in August 2019, punished by slumping travel during the pandemic.