The Biggest Single-Day Loss in History? Rumors and Facts about the Selloff in Chinese Stocks

By Peng Ren, contributor to the Chinese edition of Barron's

Edited by Kang Juan

Much of the information comes from fragments, rumors, reports, and discussions among friends within the circle. We have pieced them together into a logically connected puzzle.

Starting from March 24, some US-listed Chinese stocks experienced a mysterious plunge. The reason it's described as mysterious is due to the massive decline and unusually consistent movement:iQIYI, Vipshop, and Tencent Music all lost nearly half of their value within a few days, while GSX Techedu was halved in just one day. During the same period, the broader market remained relatively stable, leading to numerous rumors circulating in the market. Over the weekend, an article titled 'The Biggest Single-Day Loss in Human History' went viral online. Bill Hwang, a Korean man who bears a striking resemblance to Yue Yunpeng, and his family office Archegos Capital surfaced.

However, so far, all reports about Bill Hwang and Archegos Capital have been based on hearsay and speculation from unidentified sources. Despite these speculations being logically coherent and consistent with stock price movements, they remain merely conjectures.Barron'sChinese versionWe spoke with Chen Da, one of the earliest Xueqiu influencers to analyze this matter and a senior US stock investor, about the recent mysterious movements in US-listed Chinese stocks and their implications for investors.

Image: Bill Hwang, source: internet

Barron’s Chinese Edition: Last week, some US-listed Chinese stocks plummeted, but this round of declines was different from the broad market crash in March last year. The plunge was concentrated among Chinese education stocks, some video websites, and companies like Baidu and Vipshop, without spreading to all US-listed Chinese stocks. Meanwhile, the broader US stock market remained relatively stable. There are various theories about the reasons behind this, such as claims that it was related to the SEC beginning to push forward the 'Holding Foreign Companies Accountable Act,' or that it was due to the collapse of a certain fund. What do you think is the reason behind the recent unusual movements in US-listed Chinese stocks, or can we really know the reasons at this point?

Chen Da: Let's first organize the timeline of events. Around March 23, trading circles reported that Goldman Sachs was seeking buyers for a block trade involving US stocks. This block trade included 10 million shares of Baidu at $185 to market price; 50 million shares of Tencent Music at $17.6 to market price; and 32 million shares of Vipshop at $27.6 to market price. Not only was the volume of this block trade enormous, but the prices were also significantly lower than the market prices at the time. Thus, there were rumors that a highly leveraged fund holding large positions in these companies had collapsed and was forced to sell its shares.

The commonality among Baidu, Tencent Music, and Vipshop stocks is that they were all previously strong Chinese concept stocks, and they all began a sharp decline in stock price starting from March 24 without any external negative news. Without other contextual information, we can only assume this is due to pressure on Chinese concept stock prices, with early profit-taking exiting the market, potentially triggering margin calls for certain institutions leading to forced liquidation. It’s also possible that some quantitative trading players are actively shorting, profiting from the trend.

Next came the rumored email from Snow Lake Capital seeking to acquire $50 million each of Baidu, Tencent Music, and Vipshop shares. This seems to confirm Goldman Sachs' role in brokering trades, compounded by new regulations in the education sector, causing widespread panic among Chinese concept stocks. At this time, not only these three companies but also iQIYI, Farfetch, and others followed similar trajectories; GSX Techedu's share price was directly halved overnight, dropping about 50% in one day.

Additionally, we noticed that the movement of these stocks closely resembles two seemingly unrelated stocks: Viacom and Discovery. Both are traditional media companies that saw renewed interest as streaming expectations grew during the previous post-pandemic recovery rally, pushing their stock prices to multi-year highs. With high stock prices, management naturally became restless, and on March 23, Viacom announced a $3 billion secondary offering, which caused an immediate 9% drop in its share price, followed by a further 23% plunge the next day.

Baidu, Tencent Music, Vipshop, Viacom, Discovery, along with GSX Techedu, iQIYI, and Farfetch — these stocks, which seem to have little correlation with each other, followed the same trajectory, leading to rumors that a fund holding these positions had blown up.

Initially, there were rumors that a U.S. hedge fund called Teng Yue Capital had blown up, but later Bloomberg confirmed that the fund in question was Archegos. Both Teng Yue and Archegos share a common background: both were founded by former Tiger Management employees, known as 'Tiger Cubs,' and both have extensive experience in the Asian markets. Teng Yue was founded by Tao Li, formerly of Tiger, while Archegos was created by Bill Hwang, who managed Tiger Asia at Tiger Management.

But you're actually right about one thing: as outsiders, it's very hard for us to know insider trading information. I don’t know what these funds are really doing, and neither does anyone else unless insiders leak information because these transactions are opaque, and there's no obligation to disclose holdings publicly. Even if a fund has to file a 13F report per SEC requirements, it’s only quarterly, four times a year, and by then the information will be outdated. The most transparent example is Cathie Wood and her ARK Invest, but ARK voluntarily chooses transparency and disclosure.

So now, nobody really knows the latest holdings of these funds, nor can we judge the authenticity of the screenshots circulating online. At least in my view, this information shouldn't be leaked externally. Just today, Goldman Sachs and Morgan Stanley denied commenting on block trades in U.S. stocks. Also today, Nomura Holdings announced a 'huge loss' caused by a U.S. client, with expected losses reaching $2 billion. Rumors earlier suggested that Teng Yue Capital and Archegos accounts were opened with Nomura.

So I need to make a disclaimer: much of the information comes from fragmented sources, rumors, news reports, and discussions with friends in the industry. I’ve pieced them together into a somewhat logical puzzle that may partially restore the truth, but it’s based on speculation from the information I currently have access to, not necessarily facts, and could even be entirely incorrect.

Barron's Chinese Edition: Indeed, many judgments now are based on rumors, and the parties involved are not obligated to disclose information. Some believe that the recent plunge in certain Chinese concept stocks was triggered by the U.S. Securities and Exchange Commission (SEC) beginning to enforce the Holding Foreign Companies Accountable Act. However, this is difficult to explain since two media stocks completely unrelated to China—Viacom and Discovery—also experienced very similar movements recently.

Chen Da: When discussing the recent unusual movements in some Chinese stocks listed abroad, an important backdrop is that most of these stocks have been declining recently, just not as sharply. The reasons could be the need for valuation adjustments after significant previous gains, pressure from a new round of conflicts in US-China relations, or the U.S. Securities and Exchange Commission's claim that it is starting to implement the 'Holding Foreign Companies Accountable Act.' In short, there is downward pressure on the market for Chinese stocks listed abroad, which I believe is a crucial context. Without this broader context, none of these events would likely have occurred.

The recent performance of Chinese stocks listed abroad is not too surprising. First, last year these stocks experienced what was called a 'double-hit' effect: China’s successful control of the pandemic led to better fundamentals for Chinese companies. Additionally, most Chinese companies listed overseas are tech firms, which benefited significantly from the pandemic. This double-hit effect caused noticeable bubbles in the valuations of some Chinese stocks listed abroad last year. Therefore, the underlying reason for the recent decline is excessive previous gains, now requiring a downward adjustment to squeeze out the bubbles.

Whether these Chinese stocks can continue to rise depends on two factors: first, whether the Federal Reserve can maintain quantitative easing; second, whether the companies themselves have solid fundamentals, capable of continually delivering on promises like Tesla.

Some Chinese stocks face substantial macro pressures such as US-China relations, compounded by minor incidents triggering sharp declines, possibly leading to a so-called widespread sell-off effect that could then spread across the entire market.

Barron's Chinese Edition: If rumors about funds like Archegos collapsing are true, why did they choose to heavily invest in Chinese stocks listed abroad?

Chen Da: First, these funds themselves were not very large. At its peak, Archegos managed around $15 billion, starting from just a few hundred million. By early this year, it reportedly had $5 billion, with a maximum of $15 billion. Therefore, its actual size wasn’t that big. To achieve high alpha returns and significant growth, it had to adopt a highly concentrated investment strategy akin to gambling. So, they leveraged heavily, borrowing substantial amounts of capital. Reportedly, its gross exposure reached several hundred billion.

The size of Chinese stocks listed abroad suits funds like this. Companies like Berkshire Hathaway cannot concentrate holdings in these stocks because their scale doesn't support large funds. Frankly, Chinese stocks listed abroad are still non-mainstream in the U.S. market, where mainstream stocks include companies like Apple, Microsoft, and Amazon.

Barron's Chinese Edition: Some Chinese stocks listed abroad have already started a wave of secondary listings on the Hong Kong Stock Exchange. Even if forced to delist in the U.S., this move can significantly reduce losses for investors and shareholders. What’s your take on secondary listings?

Chen DaI think secondary listings may not necessarily be a great investment opportunity, but for these companies, it does offer some diversification in financing. I believe that for these companies and investors, it will reduce financing risks, which is inherently beneficial for the companies.

When I previously evaluated Baidu's secondary listing, I analyzed the potential benefits or premium that a secondary listing might bring:

First, risk avoidance. In terms of subsequent financing and regulatory risks, it also represents a form of diversification—spreading out financing locations. From a regulatory perspective, it mitigates the regulatory risks associated with the primary listing location; as the saying goes, 'a狡兔 has three dens'.

Second, improved liquidity. Trading volume increases unexpectedly, resulting in better liquidity, which should command a liquidity premium. Additionally, trading hours are extended, allowing for more timely responses to events like gray rhinos, black swans, or sudden positive news. Based on my years of experience investing in U.S. stocks, the worst fear when buying or selling stocks is not a stock crash, but rather a lack of interest, no trading activity, and prolonged declines.

Third, attracting talent. By listing on the Hong Kong stock market—the 'Nasdaq of China'—the pool of people who can participate in the tech stock dividend expands. Many institutional investors cannot invest in U.S. stocks but can invest in Hong Kong stocks, so they can now join in. Although Stock Connect currently does not support secondary-listed stocks, this may change in the future, making it easier for domestic investors to buy in.

Fourth, riding the wave. Large technology companies such as Baidu, a leading player in China’s artificial intelligence sector, could very likely be added to certain indices as constituent stocks, prompting index-tracking funds to passively build positions. This could be considered a premium from being carried along by market forces.

There's also another reason, which could be called a cultural home-field premium. After all, Hong Kong is their home turf, and Hong Kong investors are more familiar with companies from the Chinese-speaking world. Therefore, after returning to Hong Kong, these stocks may experience a home-field premium compared to their U.S. listings. Conversely, in the U.S. market, Chinese stocks have long faced a 'foreign company discount' (country risk spread), which would further support valuations.

For investors, a secondary listing is beneficial for companies and should also be advantageous for investors. In fact, many companies face pressure in the U.S. market. If they return to the Hong Kong stock market, the Hong Kong market is relatively more accommodating towards these Chinese stocks.

So, considering these points, I believe a secondary listing is quite favorable for these companies. That’s why I understand why an increasing number of companies are lining up for secondary listings—at least securing a spot, since the policies for secondary listings could change in the future.

Barron's Chinese Edition: Regarding the impact of the U.S. Securities and Exchange Commission's announcement that it is starting to implement the Holding Foreign Companies Accountable Act, some have pointed out that even if the final amendment is implemented, it would still take three years before trading could truly be prohibited. Within these three years, there is still considerable uncertainty, so the short-term impact on Chinese stocks is mainly emotional. The long-term effects will depend on the specific enforcement of the policy. What is your view on this analysis?

Chen Da: I think this can be considered a reconfirmation of the political legacy of the Trump era in the Biden era. The bill had already passed both houses last December, but the introduction of detailed rules by the US Securities and Exchange Commission has had some impact on investor sentiment, though I believe it is more of a short-term effect.

Although we all know that this rule is aimed at Chinese companies listed in the US, we should still rationally recognize that the bill itself does not discriminate based on nationality. 'Overseas companies' refers to all companies outside the US, while American companies are naturally subject to US auditing supervision, so this is not a discriminatory bill.

I personally agree that companies listed in the US should maintain a certain level of financial transparency and be audited by US authorities. Going public in the US is a voluntary transaction; if you don’t want to be regulated by others, you can choose not to go public. Many Chinese companies have commercial, military, or technical intelligence that they do not wish to disclose to the US, so they can opt not to list in the US. Additionally, some Chinese companies listed abroad have indeed committed fraud, and I believe someone should regulate them. Currently, regulation is actually insufficient.

The above is the factual part. Whether this will affect Chinese companies is a subjective viewpoint. Although there may be significant volatility in sentiment in the short term, my personal judgment is that in the long run, it will have little impact on large Chinese private technology companies. The possibility of being delisted is extremely low, and even if you do not comply with its audit requirements, it takes three consecutive years before delisting occurs. Among the companies I follow, I don’t think any face the risk of being delisted, although compliance costs will increase.

Barron's Chinese Edition: Do you think the recent plunge in these Chinese companies listed in the US will have an impact on their long-term value? Is this an investment opportunity or a trap?

Chen Da: I think whether the recent plunge in Chinese stocks listed in the US is a trap or an opportunity cannot be generalized. For companies with relatively good fundamentals, such as Tencent Music, Baidu, and Vipshop, these are quality companies. Compared to typical internet companies, first, they at least generate revenue, and second, their price-to-earnings ratios are not high, so they cannot really be considered bubbles.

Therefore, the decline of these companies does not reflect their fundamentals. I think it’s a good opportunity to buy the dip or build a position because it’s an irrational market selloff. The reason for the drop is that funds holding other companies truly affected by deteriorating fundamentals have faced margin calls and were forced to sell, unrelated to the companies’ actual performance.

But one shouldn't be too certain about all of this. After all, the US stock market has been in a bull market for many years. Although I’ve always been bullish and optimistic about the bull market continuing, and I don’t believe it will easily turn bearish, I think that given the current overall high valuation of the system, everyone should be relatively conservative and also more cautious.

Moreover, for some companies with less solid fundamentals, such as RLX Technology in the e-cigarette industry and Gaotu Techedu in the education sector, I think overseas investors are being overly optimistic about the development of these companies. They might believe that these companies have excellent business models, but in reality, if they face regulatory pressure from the Chinese government, many of these companies’ promises simply cannot be fulfilled.

Therefore, in this situation, you should not rashly jump in to catch the falling knife. If you’re not implementing defensive strategies or hedging, then fine, but at the very least, you shouldn’t maintain such high leverage like Bill Hwang did, which is extremely dangerous behavior.

Additionally, I think if you were to run a regression analysis, apart from observing trends in the A-share market and the Nasdaq index, you might find that fluctuations in the RMB exchange rate are highly correlated with U.S.-listed Chinese stocks.

For instance, during the crazy bull market period of A-shares in 2015, it was also a frenzied bull market era for U.S.-listed Chinese stocks because many investors in these stocks are still Chinese institutions and individuals. Another reason is that when the domestic economy heats up, the RMB tends to appreciate. Even if the performance of U.S.-listed Chinese stocks doesn't grow, if the RMB appreciates against the USD, your returns effectively increase as well.

It’s difficult to predict the movement of U.S.-listed Chinese stocks at this point. I think it's a relatively sensitive time in the market right now, and the entire system is at a complex stage. It’s hard to attribute market moves to a single factor because the system is exceptionally intricate. As a result, certain factors may escalate beyond expectations, leading to black swan events. Therefore, ensuring portfolio diversification and risk management is critical.

Barron's Chinese Edition: Thank you!

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