Shorting Chinese stocks is the third most crowded trade in wake of Beijing’s crackdown, fund managers tell BofA

Didi Chuxing China ride-hailing app
Beijing has cracked down on tech companies such as Didi. VCG/Getty Images
  • Fund managers said shorting Chinese stocks became the third most crowded trade in August, according to Bank of America.
  • Beijing has tightened its grip on tech and education companies, causing investors to shift their positions.
  • China policy is now considered a leading tail risk by fund managers, BofA’s August survey showed.
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Fund managers said they think investors are ramping up their bets against Chinese stocks after Beijing launched a regulatory crackdown on big companies in the tech and education sectors.

Bank of America’s monthly survey, published Tuesday, found that fund managers think “short China stocks” was the third most-crowded trade in August after barely registering in July. To short means to bet that the price of a stock or asset will fall.

The BofA survey also showed that fund managers now rank Chinese policy as one of the top five “tail risks” to markets, despite saying they weren’t concerned about it in July.

Beijing has been tightening its grip on China’s big companies for some time. For example. it halted Ant Group’s $37 billion initial public offering just before it was due to happen in November 2020.

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Yet the authorities have stepped up their scrutiny of technology and education companies in particular, over the last few months.

In early July, Beijing demanded China’s biggest ride-hailing platform Didi Chuxing be pulled from app stores just days after a blockbuster US IPO that raised $4.4 billion. The move sent the company’s US stocks tumbling and cast doubt on future listings of Chinese companies.

Fund managers said “emerging market risk” is the biggest threat to financial stability in August, as a result of China’s regulatory crackdown. BofA spoke to 232 fund managers with a total of $702 billion under management, with the survey conducted between August 6 and 12.

China’s crackdown contributed to the 8.2% drop for the CSI 300 index of Shanghai and Shenzhen-listed stocks in July.

Star fund manager Cathie Wood was among those to ditch Chinese stocks, saying in a webinar that a “valuation reset” among Chinese stocks is occurring, and that their valuations could remain depressed for some time.