Hong Kong stock traders turned the most bearish Thursday since February, a signal to Forsyth Barr Asia Ltd. that the market is poised to gain.
Short-selling accounted for 12 percent of turnover in Hong Kong yesterday, the most since Feb. 24, data compiled by the exchange and Bloomberg show. The benchmark Hang Seng Index added 1.2 percent at 1:39 p.m. local time, while Shanghai shares erased a weekly loss as unprecedented policy measures to end the mainland’s equity rout gained traction.
“Shorts have been increasing on fears that Chinese government equity market intervention will fail, and the fallout may stoke a financial crisis,” said Bill Bowler, a sales trader at Forsyth Barr in Hong Kong. “This generally exacerbates any upside moves as latecomer, low conviction shorts unwind.”
Since mid-June, Hong Kong’s market has been hostage to a mainland slump that wiped almost $4 trillion of value off Chinese shares and stoked the highest volatility since 1997. The Hang Seng Index is valued at near the cheapest versus global equities in more than a decade, with companies from HSBC Holdings Plc to New World Development Co. trading below book value. The Hang Seng gauge has rebounded 8.3 percent from its July 8 low after tumbling 17 percent in less than three months.
China Vanke Co., Pacific Basin Shipping Ltd. and China Singyes Solar Technologies Holdings Ltd. were among the most-heavily shorted Hong Kong companies this week, according to Markit Group Ltd. data.
After short-selling reached a peak on Dec. 3, the Hang Seng Index gained 2.6 percent over the next three days, while a surge in bearish bets in January was followed by a 4.9 percent five-day advance. The measure last week posted its biggest loss since March 2014, and is set for a 2.2 percent rebound this week.
Options traders are also bearish. One-month puts that pay out if the Hang Seng Index drops 10 percent cost 8.6 points more than contracts betting on an equivalent gain, according to data compiled by Bloomberg as of Thursday. The difference, known as skew, widened last week to the most since June 2012.
“The market was not positioned for the recent decline but has started building downside protection as the price action stabilized,” said Bowler.
Chinese regulators have introduced a series of measures to stop the rout, from clamping down on “malicious” short selling to suspending new listings. It took until July 9 for mainland shares to finally start to rebound.
“We believe that the Chinese government will be able to manage this crisis but there will be continued volatility in the near term,” said Ben Kwong, a director at brokerage KGI Asia Ltd. in Hong Kong. “China’s stock market remains relatively unstable. Investors need to make use of vehicles to hedge against the risk.”