China's most risky short goes from first to worst

After suffering through a 953 per cent rally in shares of Yirendai Ltd since mid-February, hedge funds and other bearish speculators were rewarded over the past four days as the Chinese peer-to-peer lender sank 35 per cent in US trading. Holding on to the trade has been especially costly after annualised borrowing rates for Yirendai shares jumped to about 40 per cent, the highest level among big Chinese companies tracked by IHS Markit Ltd.

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China's most risky short goes from first to worst

Bloomberg
27 August 2016

Stock traders who have been stuck with China's most painful short sale are finally getting some relief.

After suffering through a 953 per cent rally in shares of Yirendai Ltd since mid-February, hedge funds and other bearish speculators were rewarded over the past four days as the Chinese peer-to-peer lender sank 35 per cent in US trading. Holding on to the trade has been especially costly after annualised borrowing rates for Yirendai shares jumped to about 40 per cent, the highest level among big Chinese companies tracked by IHS Markit Ltd.

Yirendai's reversal from first to worst on the performance rankings of major Chinese companies marks the latest twist for a stock whose movements traders have struggled to explain. The intrigue has been heightened by an unexplained shrinkage in the supply of lendable Yirendai shares, a development that boosted costs for short sellers and made them more vulnerable to a squeeze. "Yirendai is a relatively odd stock," said Wei Hou, a Hong Kong-based banking analyst at Sanford C Bernstein & Co. "The share-price rally has been a mystery to me."

Theories for the surge abound. Some say it was driven by a jump in Yirendai's second-quarter earnings; others argue fundamentals don't tell the whole story. JL Warren Capital, a China-focused research firm in New York, alleges that Yirendai used an undisclosed employee stock-buying program to squeeze short sellers and curb the supply of lendable shares, citing as its source an executive at Yirendai's parent company identified only by the surname Zhang. Dennis Cong, Yirendai's Beijing-based chief financial officer, denied that employee purchases had been fuelling the stock's advance. He added that new P2P regulations being cited for the shares' recent drop won't hurt the company.

While it's too early to tell if short sellers will ultimately prevail, a victory would come as a relief to China bears who've been rattled by a government-orchestrated shake-out of yuan speculators in January and a raft of mistimed bets against Hong Kong-listed Chinese shares in May.

The nation's peer-to-peer lending industry has been an especially tempting target. Almost 1,000 P2P platforms have collapsed over the past year, including what Chinese authorities say was the country's biggest ponzi scheme. While Yirendai's business is legal, and it hasn't been accused of any wrongdoing, the company's status as China's only publicly-traded P2P lender tracked by Bloomberg has turned it into an industry proxy. Yirendai makes money by connecting small borrowers with investors, charging fees on both sides of the transaction.

The model has proven lucrative as millions of small-time borrowers turn to P2P platforms for financing. Yirendai's net income jumped 226 per cent in the second quarter from a year earlier to almost 261 million yuan (S$53 million), as the value of loans arranged on its platform more than doubled.

"There is a certain level of fundamental support for the stock," said Eric Xu, founder of North Oakridge Capital, which invests in US stocks including American depositary receipts of Chinese companies. Mr Xu said he has cut his holdings by half after the shares reached a record US$40, acknowledging that the speed of the rally has been "a little crazy". The stock, which debuted in December at US$10, was little changed at US$24.53 in New York on Thursday.

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