US investors are lining up to short Chinese stocks in record numbers

A 150% plus rally in just 12 months, along with steep falls earlier this week, seems to be drawing out US-based China bears.

In record numbers they’re putting money where their mouths are, and short-selling ETFs that track Chinese yuan-denominated shares.

According to a report from Bloomberg, using data provided by Markit, “short interest in the largest exchange-traded fund tracking yuan-denominated equities rose to a record 16 percent of shares outstanding Wednesday”. Only a month ago short interest stood at just 8%, according to the report.

Trade in Chinese shares, amidst an epic bull run seen over the past 12-months, has become increasingly volatile in recent weeks. The average daily trading range on China’s Shanghai Composite this month has been 156 points, or 3.15% of the previous session’s closing level. This compares to an average trading range of 89 points, or 2.33%, seen in the previous five months.

The increased volatility, despite seeing stocks hit a multi-year high last week, has led many to speculate that a severe correction, or worse, could eventuate given bubble-like qualities that have accompanied the mind-boggling rally.

Earlier this week Hao Hong, chief China strategist at Bocom International Holdings in Hong Kong, suggested that volatility in Chinese stocks would increase before “a crash eventually happens”.

Michael Mullaney, chief investment officer at Fiduciary Trust in Boston, expressed similar sentiment overnight, telling Bloomberg the “selloff has further to go before it gets back to a much more rational trading pattern compared with this liquidity-induced bubble that they’re in right now”, adding “everything will always eventually come back to the macroeconomic backdrop for China, which is still slowing”.

For the moment the short-sellers will be happy. At the mid-session break the Shanghai Composite is lower by 2.05%, on track to record the largest weekly percentage decline seen since October 2008.

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