Carson Block Says Hong Kong Stock Manipulation Is Burning Shorts

  • Short seller speaks after Huishan discloses negative net worth
  • 2017 has been a difficult year for bears in Hong Kong

Carson Block, the short seller who rose to fame by making savvy bets against Chinese companies, says it’s getting tougher to target overvalued shares in Hong Kong because the market is rife with manipulation.

Chinese investors are using the Hong Kong exchange link to artificially inflate prices of shares targeted by short sellers, Block, the founder of Muddy Waters Capital LLC, alleged in an interview on Friday. He said he thinks that some of the manipulation is directed by government-linked funds, without providing evidence.

Carson Block

Photographer: Anthony Kwan/Bloomberg

“Hong Kong was always an interesting market in terms of manipulation, but with the connect it has just become amazingly egregious,” said Block, who spoke a few hours after one of his biggest Hong Kong-listed targets, China Huishan Dairy Holdings Co., said its main units probably had a negative net worth.

Securities regulators in Hong Kong and China didn’t immediately reply to requests for comment on Block’s statements. Hong Kong’s stock exchange said it has regular meetings with its Chinese counterparts to discuss surveillance issues, adding that they work under the guidance of the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission to ensure that markets are properly regulated.

Block’s comments highlight a growing frustration with Hong Kong among activist short sellers, who have watched most of their targets in the city rally this year. While the gains aren’t hugely surprising given the Hang Seng Index’s 33 percent surge in 2017, Block and some of his peers see a concerted effort to prop up weak companies. To support their claims, they cite growing Chinese ownership stakes in companies targeted by short sellers and the willingness of state-controlled banks to assist businesses accused of fraud.

“It seems the powers-that-be want to keep short sellers out,” Block said. “And I think it’s pretty effective.”

Lines between equity markets in Hong Kong and China have blurred in recent years with the opening of two cross-border exchange links. While authorities in the former British colony have traditionally taken a laissez-faire stance when managing the city’s bourse, China has a much more hands-on approach. Beijing-backed funds regularly intervene to limit volatility on mainland markets, and have even been said to extend their reach into Hong Kong.

“Hong Kong is becoming more subsumed by mainland China every day,” Block said.

He’s not the only short seller to allege that the exchange connect is facilitating stock manipulation. Dan David, the chief investment officer at FG Alpha Management, said in August that he complained to HKEX about misuse of the link, while Soren Aandahl, the head of research at Glaucus Research Group, has said that short targets in Hong Kong are colluding with allies in China to support share prices.

Bank Support

Fullshare Holdings Ltd., a Chinese developer targeted by both Glaucus Research and FG Alpha, has climbed 15 percent in Hong Kong since Glaucus highlighted unusual trading patterns in the stock and said it was “poised to crash” in April.

The company, which denied the short sellers’ allegations, secured a two-year credit line from China Citic Bank Corp. in May and has seen a growing portion of its shares move into the hands of Chinese buyers. Mainland investors using the exchange link now own about 21 percent of Fullshare’s Hong Kong shares, up from 10 percent before Glaucus targeted the company.

Block unveiled his wager against Huishan in December, alleging that the company had overstated its sales, misrepresented its self-sufficiency in alfalfa and made an unannounced transfer of assets to an entity controlled by Chairman Yang Kai. While the stock was little changed for three months after his report, it plunged 85 percent on March 24 as news of a cash shortage at Huishan spread. On Thursday, the company said the net liabilities of its units in China “could have been” 10.5 billion yuan ($1.58 billion) as of March 31, and that it was preparing for provisional liquidation. The shares have been halted since March.

Read more about Huishan here.

Block’s last publicly-disclosed short position in Hong Kong was Man Wah Holdings Ltd., a furniture maker that he targeted in June. The stock has since climbed 11 percent as Man Wah denied Block’s allegations, and was trading 0.4 percent higher at 3:02 p.m. in Hong Kong. The short seller said on Friday that he still believes Man Wah is a fraud, while adding that he isn’t currently planning to take additional bearish positions in the city.

Among the 10 calls issued by activist shorts in Hong Kong this year, just three have been followed by declines in the stock, according to data compiled by Bloomberg. Their 30 percent success rate has dropped from 75 percent in 2016, the data show.

“There are easier ways to make money than being an activist short in Hong Kong right now,” Block said.

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