Chinese tech stocks continue to be beaten, but short sellers appear to be targeting another sector known for high valuations: real estate. China’s real estate sector saw the largest increase in short selling compared to other sectors in the third quarter, according to data analytics firm S3 Analytics, with $742 million in total new bearish bets. That compares to a cut of about $150 million in shorts on the tech sector. Short sellers profit when stocks fall. They borrow shares, sell them, and plan to buy them back when the price is lower and profit from the difference. The problems in the Chinese real estate market are not new. ETFs tracking the MSCI China Real Estate Index, such as CHIR, have fallen more than 35% this year. Short sellers in China’s real estate sector already have $2.6 billion in paper profits year-to-date, according to data from S3. This is an increase of 45% compared to the same period last year. But although short sellers took profits throughout the year, they also continued to take new short positions in stocks that did not fall as much. “Short interest in China’s real estate sector has declined for most of 2022, but it would be incorrect to assume that short sellers were reducing their positions,” S3’s research note to its clients says. Here are the five stocks that saw the largest increase in US dollar short positions in September: KE Holdings, which saw the largest increase in short positions in September, is said to be “engaged in systemic fraud” by Muddy Waters. The short seller says the Chinese company, whose New York-listed shares have risen 34% this year, has inflated its new home sales by more than 126%. KE Holdings, for its part, denied the allegations and said Muddy Waters’ report “shows a basic lack of understanding of the real estate transaction industry in China.” Analysts on average have a buy rating on the stock, giving it nearly 30% upside from its current price, according to FactSet data. The second best-selling stock, China Overseas Land & Investment, is also popular. Analysts, on average, have a buy rating on the stock and give it more than 32% upside, according to FactSet. What’s behind the new bearish bets? The Chinese real estate market had boomed for two decades, leading to an increase in speculative behavior. About two years ago, Beijing clamped down on developers’ heavy reliance on debt to make housing more affordable for its citizens. This move, along with its zero Covid policy, exacerbated the housing downturn and impacted the wider economy. The Chinese authorities are currently struggling to revive the sector despite the fall in interest rates to stimulate demand from first-time buyers. The People’s Bank of China has cut its 5-year prime lending rate three times this year to 4.3% from 4.65% at the end of 2021. “Efforts to lower mortgage rates are clearly aimed at supporting demand for housing . But we doubt that alone. will be enough to put a floor under home sales, which have continued to decline,” said Julian Evans-Pritchard, senior China economist at Capital Economics. “The main factors holding back buyers are not the cost of borrowing, but the expectation of further price declines and concern over the ability of debt-ridden developers to complete pre-sold apartments.” As the slowdown in the real estate sector is expected to last longer, “short sellers should continue to be active,” according to S3 Analytics. “Short sellers may not achieve the performance they did in their trade with China Evergrande Group, but they expect to outperform short sellers in other regional sectors,” he said. he adds.