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China Stocks Rise Despite Controversy

Stocks in this article: SBAY SHZ CVVT

As an aside, it pains me greatly to point out that Subaye (SBAY) was a stock I recently wrote about as one I wanted to "take a closer look at" but did not own. China Gengsheng Minerals (CHGS), China Shen Zhou Mining & Resources (SHZ) and Qiao Xing Universal Resources (XING) have all (rightly or wrongly) ridden up on hype over rare earths lately, and it would surprise me greatly if they hold at these levels.

As can be seen from the bar chart, the majority (56%) of U.S.-listed China small-caps have risen by up to 25%, while about only 34% have declined.

It is very notable that despite the recent short-seller reports, there are no significant outliers toward the left end (negative territory) of the chart. This was somewhat surprising to me. However, a closer look at the recent performance of these stocks following the short reports demonstrates that the reports are becoming somewhat less effective upon their initial release.

The impact of the short reports so far has been as follows:

This is in sharp contrast to what happened to stocks such as RINO International and China Education Alliance (CEU) that were targeted with reports in the fourth quarter of last year. RINO and CEU quickly dropped as much as 60% upon release of the reports.

I am by no means suggesting that the declines in the stocks in the table above are over. With RINO.PK and CEU the declines were so fast and steep that the short-sellers could simply cover their positions and move on without any further fight. Given that the declines of the stocks in the table have been smaller, I am assuming that the short-sellers will continue to produce further information and outspoken opinions on these stocks in an attempt to pressure them further. Meanwhile the companies are all actively fighting back, so it will be interesting to watch.

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