Short-seller Carson Block says investors in Chinese stocks have been 'pulling the wool over their own eyes' for years amid extreme risk

• Investors in Chinese assets are not accounting for risks that come from the "capriciousness" of the country's policy environment, says famed short-seller Carson Block told Bloomberg.
• China in recent weeks has ramped up regulatory crackdowns on a number of industries and companies including ride-hailing service Didi Global.
• Block has been short Chinese stocks for years.

Investors in Chinese assets have failed to heed market risks related to how quickly the government makes decisions about its domestic companies, famed short-seller Carson Block said in an interview on Bloomberg TV.

"I think that investors for the past decade were basically pulling the wool over their own eyes on the capriciousness of the policy environment in China," Block, chief investment officer of Muddy Waters Capital, said during Monday's televised interview.

He added: "So that's coming home now to bite a number of investors. But it's just one of many risks that you really need to take into account but investors have not."

Chinese regulators in recent weeks have stepped up regulatory crackdowns on companies ranging from transportation and logistics, education technology and delivery services industries, with a data security review launched against ride-hailing company Didi Global just days after its shares started trading in the US on June 30.

More than $1 trillion in value has been wiped from Chinese stocks traded in the US and on the mainland since February, according to Bloomberg. China has been targeting private companies in its effort to tackle issues such wage inequality, education costs, anti-competitive behavior and security risks it sees in Chinese firms listing in the US.

Policy risks are among the reasons why, all other things being equal, a stock in China should trade at a significant discount relative to a stock of a US-based company, Carson said. "But often we've found that they don't because investors like to tell themselves these fairy tales about it."

He said he has told investors that Chinese economic data is "not real data," and that there's "inaccuracy and then lying embedded in that and nobody takes that seriously," but that investors insist they need exposure to China's growth prospects.

Block has been short Chinese stocks for years. He also said investors are operating in a world in which low interest rates and financial repression are forcing them to push more money in equity markets and take on more risk.

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