(Reuters) -Analytics firm S3 Partners warned of another surge in short-selling of U.S.-listed Chinese companies on Wednesday as a clampdown by Beijing drove a third straight day of selling of ride-hailing giant Didi.
Shares in Didi Global Inc, only in its fifth day of U.S. trading after what had looked like a successful New York launch last week, dropped 4.7%.
It has now leaked $14 billion, or around 20% of its market value, since a first round of announcements by Beijing on Friday, according to Reuters calculations.
China’s market regulator on Wednesday fined internet companies including Didi, Tencent Holdings Ltd and Alibaba Group Holding Ltd for failing to report earlier merger and acquisition deals for approval.
Alibaba shares fell about 0.3%, while those in Tencent dropped 1.9%.
S3 pointed to the potential for the clampdown on domestic companies listed on the U.S. market to prove the spark for another burst of short-selling in such shares, after bears were forced to close out some positions earlier this year.
Short interest in the group has fallen to $43.5 billion from $50.6 billion this year, while short interest as a percentage of float fell to 3.81% from 5.67%, reflecting a closing out of some positions that were in the red after a market rally in January and February, Ihor Dusaniwsky, S3’s managing director of predictive analytics said in a report.
The shorts, bets that shares will fall in the future, however, are now in profit overall for the year, suggesting there is now space for hedge funds and other speculators to bet on more losses after the clampdown launched last week.
“For Didi, the situation is bleak, but for Chinese companies preparing to list in the U.S. it may be even bleaker,” said Samuel Indyk, senior analyst at uk.Investing.com.
“As the risk of investing in Chinese tech in the U.S. increases, the ability of Chinese tech firms to raise capital drops with it, making listings in the U.S. less attractive going forward.”
S3’s Dusaniwsky said the market should expect more short selling and a reduction of “short covering” — market jargon for the closing of positions, normally those that are in the red.
Invesco Golden Dragon China ETF, which tracks U.S. exchange-listed companies that are headquartered in China, has lost a third of its value from its February high, meaning short sellers who bet against the index over that period should have profited.
In a sign of nervousness among investors about Didi, index publisher FTSE Russell also warned that it would not include Didi’s shares in its global equity indexes if trading is halted in Wednesday’s session.
Funds benchmark trillions of dollars of assets against FTSE Russell indexes and, by size, Didi would otherwise be expected to be included.
Valued at about $60 billion, Didi is the largest U.S. listing by a Chinese company since 2014. U.S. ride hailing company Uber Technologies’ market capitalization was last at $95 billion.
Reporting by Medha Singh and Akanksha Rana in Bengaluru; Editing by Patrick Graham and Shounak Dasgupta
