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Pioneer Chinese short-seller seeks to cleanse market for profit
September 5, 2012 / 9:00 PM / 5 years ago

Pioneer Chinese short-seller seeks to cleanse market for profit

SHANGHAI, Sept 6 (Reuters) - Shortly before the Shanghai stock market closed on Aug. 13, Huang Sheng, China’s first celebrity short-seller, declared victory over CITIC Securities Co after its shares swooned 9 percent in a rough day’s trade.

“I’ve shorted CITIC,” Huang said in a blog posted about 40 minutes before the closing bell, adding he expected the stock to fall further.

He was right. Shares in CITIC Securities, the country’s biggest listed brokerage, have continued to decline since, and Huang earned a tidy profit on his short position thanks to reforms that allowed short-selling of mainland shares for the first time less than two years ago.

Those that followed his example made money too. On the day Huang published his post, 2.249 million CITIC shares were short-sold, almost the maximum amount available for the purpose.

The prognostications of Huang, 33, who says he has an economics degree from prestigious Peking University and many years of experience in banking and private equity, have attracted plenty of attention. His microblog boasts 233,823 followers -- almost as many as China’s largest mutual fund’s micro-blog -- and he is often quoted in the domestic press.

His strategy was pioneered by Western short-sellers in China. Companies like Muddy Waters - a name referring to a Chinese proverb about taking advantage of murky situations - published allegations about accounting irregularities at U.S.-listed Chinese firms that caused multiple forcible delistings, a swathe of shareholder lawsuits and investigations by overseas regulators.

By borrowing stock in such companies at a higher price and repaying it at a much cheaper one, the Western shorters made millions of dollars, if few friends.

Huang is trying to implement a milder version of that strategy in China, but he faces far more formidable obstacles than the foreigners did.

“I don’t think that the regulatory system in China is ready for ‘Muddy Waters’ kind of short-sellers,” said Paul Gillis, professor at Peking University’s Guanghua School of Management.

“I think there’s going to be a knee-jerk reaction by regulators to defend the company.”

While short-selling remains legal, regulators have recently begun targeting “rumour-mongering” about listed companies.

Regulators said such rumours played a role in the dive in CITIC Securities shares on Aug. 13. Huang was not the only blogger saying CITIC was overvalued on that day: another claimed that CITIC had lost $2.9 million yuan overseas; another, that the company’s boss was targeted by a criminal investigation; yet another, that massive layoffs were imminent.

The China Securities Regulatory Commission (CSRC) said on Tuesday it would punish three individuals for concocting the rumours, but made no mention of Huang or short-selling. Huang told Reuters he has not been targeted by the CSRC.

TOUGH LOVE

Like the foreign short-sellers, Huang argues that he is providing the market with a cleaning service.

“The water in China’s stock market is muddy indeed,” he said. “There are too many cases of fraud and deceit in Chinese listed companies. Short-sellers can help supervise and punish them.”

China launched short-selling in late 2011, allowing investors to sell borrowed stocks. But the business is restricted to fewer than 300 of the country’s nearly 2,500 listed companies and the number of shares available for lending is limited.

The politically connected nature of listed Chinese firms makes them dangerous targets. Some Western shorters, who claimed to root through trash cans and count trucks leaving factories to find cases of accounting fraud, said that managers at targeted companies attempted to intimidate them.

John Carnes, a U.S.-based short-seller who successfully attacked a string of Chinese companies in 2010-2011 under the pseudonym Alfred Little, said one of his Chinese researchers had been jailed for investigating U.S.-listed Chinese companies on his behalf and he feared retaliation.

But Huang said that his comments on listed firms were based on publicly available information, to which he applies his professional analysis.

For example, his attack on CITIC Securities was based on an argument that it had overpaid for Credit Agricole’s Asia brokerage unit CLSA in March.

For Beijing, short-selling is a double-edged sword. On the one hand, it wants to restore confidence in domestic equities markets by improving transparency and reducing share price distortions, and short-selling can play a positive role in both.

But short-sellers can also profit from unsubstantiated rumours, so long as the rumours push share prices down. Given that domestic markets look set to post a third straight year of decline, encouraging more public negativity about equities could do more harm than good.

Gillis of Guanghua said that wider reforms must precede, not follow, the expansion of short-selling in China.

“If you have a market that is not transparent and the auditors are not effective and the regulators are not effective, you create a target-rich environment for short-sellers ... and they will ultimately destroy the entire marketplace.”

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