Short-seller Carson Block triggered a small panic in Hong Kong on Tuesday after he told Bloomberg that he had identified a new short play listed in the former British colony.
His comments triggered a flurry of speculation in the city’s $4.6 trillion equity market, Bloomberg reported. The Hang Seng Composite Index dipped shortly after Block appeared on Bloomberg. Shares of Tongda Group Holdings Ltd., Man Wah Holdings Ltd. and Sunny Optical Technology Group Co. tumbled on concerns that they could be in Block’s crosshairs. For his part, Block said he will reveal his latest short at the Sohn Hong Kong conference on Wednesday.
The trading action was reminiscent of a similar incident last week when shares of Element Fleet Management Corp., a Toronto-listed stock, dipped as traders tried to front-run Block's latest announcement.
Block told Bloomberg that he believes there are many Hong Kong-listed firms that are completely fraudulent. But these firms are difficult to short because their shares are being manipulated.
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As Bloomberg noted, Block’s firm and his clients have probably already started building bearish positions in his next target.
Andrew Clarke, director of trading at Mirabaud Asia Ltd. in Hong Kong, said that Block was being irresponsible by refusing to reveal the name of his latest short.
“Saying he will name a short tomorrow afternoon in his speech is rather irresponsible as there must be at least 50 stocks down by 5 percent,” Clarke said.
“But he is only naming one, so he has potentially created a small panic selloff in 49.”
“The manipulation is really a function of so many of these companies having such small floats. What is often really the case, even if nominally the float is 25%, probably the chairman through proxies controls another 10% to 15% of the float. There’s a lot of market cap notionally for short sellers to short, but the problem is, when it’s a manipulated stock, it can be pretty hard to wait for that stock to break.”
Back in December, Block published a report on Huishan Dairy, the largest owner of dairy farms in China, saying the stock was worth close to zero. Initially, shares barely moved. But in March, the firm’s shares suddenly imploded after nine of its 10 board members left the company and its treasurer disappeared.
Block has been very critical of China's economy and Chinese companies. He’s said that the world’s second-largest economy is struggling with both an asset and a credit bubble, and that the “laws of economics” dictate that China will soon face “a day of reckoning.”