SHANGHAI, Sept 6 (Reuters) - Shortly before the Shanghai
stock market closed on Aug. 13, Huang Sheng, China's first
celebrity short-seller, declared victory over CITIC Securities
Co after its shares swooned 9 percent in a rough
"I've shorted CITIC," Huang said in a blog posted about 40
minutes before the closing bell, adding he expected the stock to
He was right. Shares in CITIC Securities, the country's
biggest listed brokerage, have continued to decline since, and
Huang earned a tidy profit on his short position thanks to
reforms that allowed short-selling of mainland shares for the
first time less than two years ago.
Those that followed his example made money too. On the day
Huang published his post, 2.249 million CITIC shares were
short-sold, almost the maximum amount available for the purpose.
The prognostications of Huang, 33, who says he has an
economics degree from prestigious Peking University and many
years of experience in banking and private equity, have
attracted plenty of attention. His microblog boasts 233,823
followers -- almost as many as China's largest mutual fund's
micro-blog -- and he is often quoted in the domestic press.
His strategy was pioneered by Western short-sellers in
China. Companies like Muddy Waters - a name referring to a
Chinese proverb about taking advantage of murky situations -
published allegations about accounting irregularities at
U.S.-listed Chinese firms that caused multiple forcible
delistings, a swathe of shareholder lawsuits and investigations
by overseas regulators.
By borrowing stock in such companies at a higher price and
repaying it at a much cheaper one, the Western shorters made
millions of dollars, if few friends.
Huang is trying to implement a milder version of that
strategy in China, but he faces far more formidable obstacles
than the foreigners did.
"I don't think that the regulatory system in China is ready
for 'Muddy Waters' kind of short-sellers," said Paul Gillis,
professor at Peking University's Guanghua School of Management.
"I think there's going to be a knee-jerk reaction by
regulators to defend the company."
While short-selling remains legal, regulators have recently
begun targeting "rumour-mongering" about listed companies.
Regulators said such rumours played a role in the dive in
CITIC Securities shares on Aug. 13. Huang was not the only
blogger saying CITIC was overvalued on that day: another claimed
that CITIC had lost $2.9 million yuan overseas; another, that
the company's boss was targeted by a criminal investigation; yet
another, that massive layoffs were imminent.
The China Securities Regulatory Commission (CSRC) said on
Tuesday it would punish three individuals for concocting the
rumours, but made no mention of Huang or short-selling. Huang
told Reuters he has not been targeted by the CSRC.
Like the foreign short-sellers, Huang argues that he is
providing the market with a cleaning service.
"The water in China's stock market is muddy indeed," he
said. "There are too many cases of fraud and deceit in Chinese
listed companies. Short-sellers can help supervise and punish
China launched short-selling in late 2011, allowing
investors to sell borrowed stocks. But the business is
restricted to fewer than 300 of the country's nearly 2,500
listed companies and the number of shares available for lending
The politically connected nature of listed Chinese firms
makes them dangerous targets. Some Western shorters, who claimed
to root through trash cans and count trucks leaving factories to
find cases of accounting fraud, said that managers at targeted
companies attempted to intimidate them.
John Carnes, a U.S.-based short-seller who successfully
attacked a string of Chinese companies in 2010-2011 under the
pseudonym Alfred Little, said one of his Chinese researchers had
been jailed for investigating U.S.-listed Chinese companies on
his behalf and he feared retaliation.
But Huang said that his comments on listed firms were based
on publicly available information, to which he applies his
For example, his attack on CITIC Securities was based on an
argument that it had overpaid for Credit Agricole's
Asia brokerage unit CLSA in March.
For Beijing, short-selling is a double-edged sword. On the
one hand, it wants to restore confidence in domestic equities
markets by improving transparency and reducing share price
distortions, and short-selling can play a positive role in both.
But short-sellers can also profit from unsubstantiated
rumours, so long as the rumours push share prices down. Given
that domestic markets look set to post a third straight year of
decline, encouraging more public negativity about equities could
do more harm than good.
Gillis of Guanghua said that wider reforms must precede, not
follow, the expansion of short-selling in China.
"If you have a market that is not transparent and the
auditors are not effective and the regulators are not effective,
you create a target-rich environment for short-sellers ... and
they will ultimately destroy the entire marketplace."