Chinese firms must be prepared for short-selling

By Liang Haiming Source:Global Times Published: 2017/6/28 22:08:39

Illustration: Peter C. Espina/GT

At least six overseas-listed Chinese companies have been attacked by global short-sellers in recent days. These short-selling campaigns have gained pace, covering a wide range of industries and regions. What's shocking is that these short-sellers always succeed in making fortunes. They even publicly reveal their targets in advance, highlighting the degree of confidence in such short-selling activities. As such, China should stay alert to the risk of short-selling attacks on overseas-listed Chinese companies that have investment projects in countries along the Belt and Road (B&R) route, so as to avoid any adverse impact.

Short-sellers are all based overseas, because short-selling of shares is almost prohibited in the Chinese mainland. Many investors in the domestic market think that it is improper to short a listed company, which is why the authorities must regulate such behavior properly.

However, in the mature global market and international financial centers, it is common to hold short positions in a company's shares. And there is no need to judge whether short-selling is "reasonable" or not.

Moreover, even in the US, which has relatively well-developed systems for scrutiny of the financial market, there is no such a thing as a standard for short-sellers. In the global markets, if a short-seller alleges a fraud or misrepresentation but it is actually not the case, the short-seller will then pay a high price for it. Therefore, short-sellers usually take action only after a great deal of thought and reflection.

Nevertheless, it should be pointed out that although it is impossible to restrain short-selling activities, overseas-listed Chinese companies can take a variety of measures to deal with sudden short-selling attacks. First, they should clarify the facts in a timely manner. Second, they should have backup funds ready so that they don't need to rely too heavily on funding from the stock market.

In the past, many overseas-listed Chinese companies suffered great losses during short-selling campaigns because their major shareholders or management pledged their own stocks to obtain finance. Short-sellers are usually able to rake in large profits from such companies.

In my opinion, overseas-listed Chinese companies should prepare financing channels in both primary and secondary markets. When short-sellers target their stocks or when stock prices perform badly, it's actually an opportunity for major shareholders to buy stocks on the cheap. In the case of a standardized business, low prices should be a good opportunity for long-term shareholders, and volatility in stock prices should not affect the normal operation of a company's business. Many large companies in the US evaluate all of the potential advantages and disadvantages before deciding whether to go public or not. Even after getting listed, companies can choose to go private again if the market is bearish, and may go public again when the market recovers. The Chinese mainland market will also gradually develop toward this direction in the future, and at that time short-selling will not be seen as a big challenge.

For overseas-listed Chinese companies that have already invested or plan to invest in B&R countries, it is necessary to take precautions to prepare for short-selling attacks in advance. Because short-sellers often use media stories to frighten the market, and since the B&R is a prominent issue for the international community, global media reports sometimes add fuel to the fire when reporting on short-sellers' activities. This could not only add to pessimism about the target company, but might also smear the construction of the B&R. Thus, relevant companies and authorities should be cautious about this issue.

In short, as long as overseas-listed Chinese companies behave themselves, they don't need to be afraid of short-selling activities. Even if a company comes to the attention of short-sellers, there are a variety of ways to deal with them. Companies investing in B&R countries should be alert to short-selling so as to avoid unnecessary losses.

The author is chief economist at the China Silk Road iValley Research Institute, a Guangzhou-based think tank.


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