Here's How Short Sellers Are Playing The China Coronavirus Outbreak

Stocks have taken a big hit in the past week on Wuhan coronavirus fears, but Chinese stocks have gotten hit especially hard. Not surprisingly, short sellers have been particularly active in certain Chinese stocks.

On Wednesday, S3 Partners analyst Ihor Dusaniwsky did a deep-dive on U.S.-listed Chinese stocks and ETFs to identify how short sellers are approaching the coronavirus.

Dusaniwsky found that short interest in U.S.-listed Chinese and Hong Kong stocks is up $337 million since Jan 20. Short interest in Chinese ETFs is up $62 million in that time. Here are the three Chinese ETFs that have been the most heavily shorted since the coronavirus outbreak (sorted by rise in short interest):

• ISHARES TR/MSCI CHINA ETF MCHI, +$70.5 million.
• iShares FTSE/Xinhua China 25 Index FXI, +$45.3 million.
• KRANESHARES TR/CSI CHINA INTERNET KWEB, +$11.5 million.

Most Shorted Stocks

Short sellers have been much more aggressive in betting against a handful of Chinese stocks. Here are the three U.S.-listed Chinese stocks with the largest rise in short interest since the outbreak began:

• Trip.com Group Ltd TCOM, +$122.7 million.
• Baidu Inc BIDU, +$96 million.
• Luckin Coffee Inc - ADR LK, +76.3 million.

But short sellers are blindly selling anything related to China. In fact, short sellers have been taking advantage of the coronavirus dip to exit or dial back short positions in several Chinese stocks. Here are the three Chinese stocks that have have the largest declines in short interest since the coronavirus outbreak began:

• Alibaba Group Holding Ltd BABA, -$36 million.
• Yum China Holdings Inc YUMC, -$34.1 million.
• NetEase Inc NTES, -$30.5 million.

Looking ahead, short selling of Chinese stocks will likely continue to be closely tied to coronavirus headlines as the Chinese New Year celebration takes place through Feb. 8.

“We expect short selling to continue with the larger market cap securities leading the pack, especially with the Chinese markets closed,” Dusaniwsky said.

Benzinga’s Take

Short sellers using the coronavirus as a near-term catalyst will likely have more opportunities to profit off of the market weakness in the days and weeks ahead. At the same time, the coronavirus scare could also provide an excellent chance for long-term investors to scoop up shares of high-quality Chinese stocks at a steep discount.

Do you agree or disagree with these predictions? Email feedback@benzinga.com with your thoughts.

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