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Shorts' Impact on China Stocks Lasting

The following commentary comes from an independent investor as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING ( TheStreet ) -- It is not possible to write an article that pleases both long investors and short investors at the same time. Yesterday, however, I found out that it is quite easy to displease both sides at the same time.

I received a substantial amount of email about my last two articles ( here and here), most of it from people who either disagreed with my conclusions or who were unhappy with the overall tone of the articles. Notably, criticism came from both longs and shorts.

Firstly, many people have challenged my notion that short attacks create a lasting overhang on the share price of the affected stock. As a result, I have compiled a table of the recent major short reports and will let readers draw their own conclusions. The list only includes what I consider to be the major reports and not simple blog attacks.

On average, share prices drop about 30%-40% in the first few days following a short attack, and so far (with the exception of Orient Paper (ONP - Get Report)) have only recovered mildly. Some have gone on to reach further lows after settling down following the report. Others have seen their share price take a few jumps due to short-covering.

Orient Paper has recovered by around 51% from its bottom but is still down 25% from its pre-short report price level.

I have left China MediaExpress' (CCME) "recovery" and "loss" columns as "to be determined" because the stock price is still very volatile, and I think it will have a very "digital" outcome when the 10-K is released in March.

Investigating Chinese Reverse Mergers
After the short reports, many of these stocks have received broad online support through various blogs and bulletin board postings, yet the road to recovery faces several challenges.

A primary problem with China small caps is that the investor base is largely dominated by retail investors as opposed to large institutions. Once burned by a stock collapse (whether justified or not), retail investors are more likely to say "never again" and abandon a stock regardless of how its fundamentals change. There are certain groups of China-focused investors (myself included) who continue to play these stocks on the fundamentals, but the fact remains that some outside capital that had previously been attracted is no longer chasing the individual stock in question, which results in a lower share price.
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