China Ming Yang is a Chinese company listed on the New York Stock Exchange. Many similar companies have turned out to be frauds or have been taken over by private equity. I’m not aware of a single fraudster being jailed, though investigators for short sellers have been thrown in jail. The incentives seem to be perverse and in favour of committing fraud. So far, the danger in shorting Chinese stocks has been:
- Private equity takeovers. Some companies heavily targeted by short sellers (e.g. Muddy Waters) have been taken over by US private equity, causing large losses for the shorts. e.g. HRBN, FMCN, etc.
- Liquidity. In the past, some of these stocks have gone up several times before going to 0.
- Borrow costs. As Chinese reverse mergers have been recognized as an area with extreme levels of fraud, short sellers have piled on.
- Short squeezes. e.g. CMEDY
- (If you own put options.) The stock may be delisted and you may not be able to exercise the puts unless you buy stock on a secondary market.
While I am not going to spent the time going through China Ming Yang’s entire 20-F filing, I believe that it is a compelling short due to the sheer ridiculousness of its related party transactions.
Shares short: 1.01M (0.8% of shares outstanding, 1.47% of float)
Borrow cost: Low single digits
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