In 2010, 47 Chinese companies listed in the United States, accompanied by the "sniping" of short sellers: muddy waters shorted Oriental Paper, resulting in the share price of Oriental Paper being "halved" in the following three trading days. Dalian Rino, which is listed on Nasdaq, was accused of financial fraud by muddy waters, and a week later, Rino was delisted by Nasdaq.

On the evening of April 7, muddy water institutions and Wolfpack Research institutions respectively issued articles saying that both sides were conducting a comprehensive study of iQIYI, Inc., believing that iQIYI, Inc. had deceptive behavior in terms of users and income. This period of time seems to set off a wave of shorting Chinese stocks, but in fact, the shorting of Chinese stocks has been accompanied by Chinese companies to the United States all the way to IPO.

Financial problems are the biggest reason why Chinese stocks are shorted.

In 2010, 47 Chinese companies listed in the United States, accompanied by the "sniping" of short sellers: muddy waters shorted Oriental Paper, resulting in the share price of Oriental Paper being "halved" in the following three trading days. Dalian Rino, which is listed on Nasdaq, was accused of financial fraud by muddy waters, and a week later, Rino was delisted by Nasdaq.

In 2011, the trend of doing air-to-air stocks is even more serious. Chinese stocks, which have been caught in the crisis of shorting repeatedly, have encountered a serious crisis of confidence, and the share prices of most of them have fallen sharply. In the second half of 2011, Tudou, the only company with access to US stocks, suffered a Waterloo when it opened. More companies are canceling their plans to list in the United States. The number of US stock listings of Chinese companies has declined continuously since 2010 and did not rebound until 2014.

There are many reasons why Chinese stocks are frequently shorted, among which "financial problems" is the biggest focus. Due to the different laws and regulations between China and the United States, the audit problem of Chinese-listed stocks has always been in an uncertain hollow zone. The opacity of its operation mode and profit means is often suspected by short sellers; secondly, some Chinese companies have been established for a short time, the operation model is not mature enough, and the risk monitoring mechanism is not perfect. There is a considerable crisis in the company itself, so it is naturally vulnerable to sniper attacks from short sellers. According to incomplete statistics, more than 106 Chinese stocks have been shorted since 2010.

Muddy Waters focus on shorting Chinese companies

Generally speaking, if a short seller is bearish on a stock, it will borrow (rent) the stock from the shareholder to get cash; after a period of time, it will spend cash to buy the same share of the stock and return it to the original shareholder. If the share price does fall during this period, that is, if the short is successful, the short seller will be able to earn the difference. There are well-known companies in the world that specialize in shorting.

Since it depends on judging the future of listed companies, how to choose short targets is particularly important. Therefore, short sellers will pay special attention to companies with uncertain profitability and continuity. Financial fraud, management violations, and falsifying data are all common doubts about shorting quality.

Different short sellers have their own preferences. Gotham, for example, is known for shorting European companies. The muddy waters betting against Lucky this time mainly prefer Chinese companies, and its founder Carlson Bullock says the name comes from the Chinese idiom "fishing in troubled waters".

Suspension and delisting is not the only result of being shorted.

But the essence of shorting is only a path of capital game, not a death knell to declare a company bankrupt.

It is normal for stocks to fall after shorting, and most of them will recover within a few days or a week. Of the 10 Chinese stocks that have been shorted recently, 8 have rebounded to varying degrees, and most of them have rebounded to unprecedented levels.

If Chinese companies respond quickly and respond to short-selling questions in a timely manner, they will be able to escape. New Oriental Education & Technology Group was shorted by Citron and Muddy Waters twice in 2009 and 2012, and its shares fell as much as 35 per cent at one point. Subsequently, the senior management represented by Yu Minhong issued an announcement to stabilize the market, set up an independent special committee, cooperated with the SEC investigation, and finally succeeded in returning the stock price to normal.

But if the company's response is not strong enough, it is likely to fall behind the "short-selling sequelae". For example, "who to learn from", which was shorted by grizzly bears some time ago, fell more than 10% in after-hours trading on April 8 due to the aftermath of Lucky iQIYI, Inc..

Companies that expose financial fraud are not so easy to turn around. At present, Ruixing has suspended trading on NASDAQ. The way that iQIYI, Inc., who was shorted, and TAL Education Group, who recently exposed financial problems, will also greatly affect the confidence of their investors.