New short positions in Chinese ADRs so far this month were the highest monthly short-selling flows in 2023, with Nio being the most shorted, Morgan Stanley said.

With US interest rates on the rise and global growth stocks underperforming, Nio (NYSE: NIO) is the most shorted US-listed Chinese stock this month, according to Morgan Stanley.

As of September 22, the newly added short positions on Chinese ADRs are up to $2.1 billion so far this month, which is already the highest monthly short-selling flow in 2023, Morgan Stanley analyst Gilbert Wong's team said in a September 25 note, citing data from IHS Markit.

The new short positions were mostly added during the week of the September Federal Reserve FOMC (Federal Open Market Committee) meeting, where hawkish guidance led to a spike in US real yields and global growth stocks underperformed, the report said.

On a stock level, the new short interest was mainly added against some crowded long positions among hedge funds like Nio, Pinduoduo and Alibaba, Morgan Stanley said.

So far this month, Nio has seen short interest flows of $867 million, Pinduoduo $675 million and Alibaba $300 million, according to a table in the note.

On the flip side, short positions in electric vehicle (EV) stocks like Xpeng (NYSE: XPEV) and Li Auto (NASDAQ: LI) were covered the most, according to Morgan Stanley.

"We note that these names have been sold down by most hedge funds YTD, so we believe the recent short covering of these names could potentially be the result of fund de-leveraging," Morgan Stanley said.

Xpeng's short position was covered by $141 million during the month, and Li Auto was covered by $49.5 million, according to a table in the note.

As of September 27, Nio was down 17.6 percent in the US for the month, Li Auto was down 16.1 percent, Xpeng was down 6.2 percent and the Nasdaq Golden Dragon China Index was down 6.9 percent.

In terms of long positions, there was no meaningful change in US institutional investors' holdings in Chinese ADRs.

Changes in long positions in Chinese ADRs have been relatively modest so far in September due to the current low allocation of global investors to Chinese equities, Morgan Stanley said.

"Our analysis shows that US fund managers have only net sold Chinese ADRs by US$0.05bn during the period, in which there's been no meaningful flows recorded from both long only and hedge fund managers," it wrote.

In terms of year-to-date position changes, US institutional investors have sold a total of $10.2 billion of China ADRs on a net basis, with long-only managers selling $6.6 billion and hedge funds selling $3.6 billion. Li Auto, Ctrip and Baidu were being sold the most by long-only year-to-date.

For hedge funds, Li Auto, Yum China and New Oriental Education saw the most selling, according to Morgan Stanley.

All employees hold Nio shares as of year-end 2022, ESG report shows