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China bears in Hong Kong abandon ETF shorts on improving economy

[HONG KONG] A once-popular trade against Chinese-listed stocks in Hong Kong has all but dried up as the world's second-largest economy defies naysayers and its equity markets rally.

Short interest on BlackRock Inc's Hong Kong-listed FTSE China A shares ETF declined to a one-year low of 3.5 per cent of shares outstanding on Monday, according to data from Markit. China Asset Management Co's Hong Kong-traded fund tracking the same index recorded short interest of 3.99 per cent of shares outstanding, the lowest since July 2016.

Fears of a hard landing for China's economy have mostly subsided as mainland authorities in the past year moved to stem capital outflows, shore up stock markets with cash injections and curb excess leverage by ordering banks to limit lending. At the same time, non-performing loans on bank balance sheets have failed to translate into big losses, frustrating some perennially bearish hedge funds.

"Investors are less negative on China A shares this year," said David Quah, head of ETFs at Mirae Asset Global Investments, a unit of Mirae Asset Financial Group. "Since the A-share market crash from its peak two years ago, the continuing high liquidity in mainland China may again see local funds rotate from property and commodity bubbles, so people think the A shares will come back up."

The BlackRock ETF is up 5.6 per cent this year, though still down 30 per cent from its June 2015 peak. The MSCI China Index has rallied nearly 30 per cent from a year ago. A share ETF stock borrowing positions have "unwound to very low levels" since mid-December as China's manufacturing data has improved and the market itself has made gains, according to Susan Chan, head of ETF and indexing investment for Asia-Pacific at BlackRock in Hong Kong.

"It's encouraging that short interest is now low and a clear sign that the mood has become more positive," said Marco Montanari, head of passive asset management for Asia-Pacific at Deutsche Bank AG. The good news on the economy is "a key reason why short interest and outflows have reduced."

In addition to declining short interest, both ETFs have experienced significant outflows from a year ago, hurting their popularity with hedge funds and other speculators. Investors have withdrawn a net US$1 billion from BlackRock's fund and US$111 million from CSOP's since February 2016, according to data compiled by Bloomberg.

"Hedge funds and short sellers don't want to pull the trigger now if liquidity is low," said Melody He, head of ETF and index solutions at CSOP Asset Management Ltd in Hong Kong. "There isn't a big trend either way so we don't see much long interest either."


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