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The cost of borrowing shares
in China's Tianhe Chemicals has risen since an
equities research house alleged last week that the company
cooked its books, suggesting the report was gaining traction
with investors.

Trading in Tianhe shares is halted at the firm's request as
it prepares a statement denying the allegations, but those who
own shares can still loan them to short sellers betting the
price will fall.

Data from trading platform Interactive Brokers shows the
cost of borrowing Tianhe shares stood at 14.5 percent on
Tuesday, up from 11.35 percent on Sept. 2 when the report by
Anonymous Analytics went public and dragged the stock down 5
percent in a few hours.

The average cost of borrowing shares in Chinese companies
trading in Hong Kong stands at around 1 percent. Some traders
and bankers said Tianhe's shares were targeted as soon as they
were eligible to be shorted in August, at a rate of 7 percent.

The Anonymous Analytics report said Tianhe had inflated its
revenues, misrepresented its customers and misstated its taxes.

Tianhe has said the "malicious" report contained errors and
misleading statements. It has yet to issue further details.

Morgan Stanley, UBS and Bank of America
led Tianhe's Hong Kong IPO in June, and Morgan Stanley's
private equity arm still holds an estimated $300 million stake
in Tianhe. Shorters note that such investors have deep financial
resources to buy up shares themselves to resist a short trend
and defend the value of their investments.

The three banks have all declined to comment on the report.

Traders and bankers say that short-sellers can end up losing
money even if allegations prove to be correct.

Stock markets in Hong Kong and in mainland China have been
rallying. That can lift even weak stocks and prompt stock
lenders to demand shorters return their shares at a loss.

In Hong Kong, firms can halt trade in their stock for years,
preventing shorters from closing out their positions.

"I've had to pay interest of over 100 percent annualized,"
said Jon Carnes, founder of short-selling research house Alfred
Little. "If the rate was 100 percent and if the halt lasted
three years, you'd lose a massive amount of money on the short,
so me personally, I'm not attracted to short-selling in Hong
Kong."

Carnes said the borrowing cost for Tianhe shares, though
high, did not imply investors expected certain catastrophe for
Tianhe. In 2011, at the height of successful short-selling
attacks on some U.S.-listed Chinese firms, borrowing costs
reached 50-100 percent annualized.

(Editing by Emily Kaiser and Mark Bendeich)