Short sellers target Chinese companies in Hong Kong, hostility mounts

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Short sellers are increasingly targeting Hong Kong-listed Chinese companies they allege have committed accounting tricks, market manipulation and fraud.
And that`s despite mounting hostility faced by investors who bet against stocks.
This year, there have been nine campaigns by short sellers against Hong Kong-listed companies as of mid-July, a record for the period, according to data from Activist Insight.
This time last year there had been only two and in 2015 six.
Short sellers said increasing capital flows between mainland China and Hong Kong, spurred by Beijing`s recent moves to open up its equity markets, were exacerbating corporate governance problems in Hong Kong.
"We suspect the increased capital flows between the mainland and Hong Kong have encouraged more stock manipulations and frauds in Hong Kong," Carson Block, founder of Muddy Waters and among the most prominent short activists, told Reuters in an email.
But calling out these frauds is not for the faint-hearted.
Those betting against companies encounter a bitter response from their targets, as well as from the shareholders in those companies and from the Chinese authorities.
The short sellers say the backlash can come in the form of litigation, smear campaigns, arrests, hacking of their information, surveillance, physical assault and death threats - against them, their staff and even their families.
Dan David, the 48-year old co-founder of U.
-based short activist GeoInvesting, says he has received emails detailing how he might die, has been the target of multiple attempted hacks, sued three times unsuccessfully, and confronted in his driveway by an angry investor.
"People would rather make money on a fraud than lose money on the truth," said David, who unveiled his most recent campaign against food manufacturer China`s Dali Foods Group (3799.
HK) in June.
David claims the company has implausibly low expenses and salary costs, while its tax filings display troubling inconsistencies.
The company has denied the allegations, which it says are misleading and based on selective information.
SMALL PUBLIC FLOATS The short sellers borrow stock in a company and then sell it to take a short position – their hope being that they can buy the stock back at a lower price and close out the position at a profit.

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