Wednesday, November 9, 2011

Bear raid shoots up lending fees on China property

HONG KONG (Nov 9): Hedge fund managers seeking to bet against China property developers are seeing the cost of borrowing shares skyrocket as investors have piled into the stocks expecting a real estate market slump.

With home sales dropping and prices falling on the mainland, short-selling volume in shares of Chinese developers has risen sharply, underscoring the sentiment that deeper pain is setting in across the sector.

Short interest in many of the most-liquid names has been high since late July, sometimes accounting for a third of all trading. Most stocks, on average, have about 5 percent of shares shorted. Short-sellers borrow shares, sell them to the market, then try to buy them back when the stock has fallen, pocketing the difference.

Rising short interest has several implications. In addition to showing that investors are not only bearish on a stock but actively betting on it to fall, a large percentage of short-selling can produce huge waves of volatility.

Short squeezes occur when short-sellers panic and cut their losses in unison, sending shares upward in a massive swing.

When stocks become heavily shorted, borrowed shares become scarce and more expensive.

In November, the cost of borrowing shares of Agile Property Holdings Ltd has risen as high as 7 percent annual interest.

Agile saw 24.1 percent of all trading volume from short sales in August and September, data from the Hong Kong stock exchange shows. That fell to just 9.3 percent of trading from October through Nov. 7. But short positions surged again on Friday and Monday, accounting for 18.6 percent of volume on those two days.

The cost of borrowing shares of China Overseas Land & Investment Ltd has also been exceptionally high, peaking in late October at about 7 percent annual interest, whereas a more usual borrowing cost is 1-2 percent.

"Clients have returned it because they're unwilling to carry excess at that rate," said a prime broker, who did not want to be named, adding that such borrowing rates were not sustainable for shorts.

"It's hard for anyone to make money on it. You're in the hole on it before you start."

China Overseas Land is one of the most popular stocks to short for investors looking to express a position on Chinese developers in general. It is the largest mainland developer by market capitalisation, and many smaller developers do not have shares that are eligible for shorting under exchange rules.

For August and September, 30 percent of China Overseas Land's volume was from short sales. That scarcely fell in the October rally, down to 28.3 percent short interest. Short sales dropped to 21.8 percent of trading on Friday and Monday, with high costs forcing borrowers to close out shorts and return the shares to the owners. The borrowing cost may have fallen from its high but is still double normal rates, at 4 to 5 percent.

Country Garden Holdings Co Ltd is also seeing heavy shorting. It experienced a big short squeeze in October, with short volume falling from 29.4 percent in August and September to just 9.3 percent of trading. But short interest was back up to 29.2 percent on Friday and Monday.

Likewise, China Resources Land Ltd saw shorting at 29.2 percent for August and September. That fell significantly over the last month, to 16.3 percent of volume from October through Nov. 7, but jumped back up again to 27.6 percent on Friday and Monday.

Many Hong Kong-listed Chinese developers that have seen heavy shorting fell on Tuesday, with China Overseas Land down 5 percent, and Agile off 4.7 percent. Longfor PROPERTIES [] Co Ltd , a developer that saw short trades account for a massive 34 percent of volume in August and September, saw some of the heaviest losses on Tuesday, down 6.1 percent. But most China developers are up Wednesday, riding a rising tide in Asian markets.

Jenny Tian, Hong Kong-based manager of China-focused hedge fund Springs Capital, said Chinese developers listed in Hong Kong were expensive to short because they were illiquid, and too many investors wanted to make the same trade. That meant there was not much value to be extracted.

"We are not shorting any property shares at this moment," Tian said. "It's a very crowded trade." - Reuters

No comments:

Post a Comment