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China stocks get some relief after rough start to 2019

Hong Kong

CHINA'S equity investors finally got some relief at the end of a week that saw indexes sink to multi-year lows.

Word that top officials had met with banks helped revive risk appetite, with brokerages surging as traders took it as a sign that Beijing would prioritise the financial sector. A reserve-ratio cut from the central bank after Friday's close added to the bullish sentiment. The boost comes ahead of a US visit to Beijing to talk trade, and any hints of improving relations could give Chinese stocks another lift.

Investors aren't rushing to hedge against equity swings despite the wild trading. Hong Kong's volatility index is actually down this week, while another tracking expected swings on the biggest China ETF in the US is barely above its 12-month average.

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Lessons from the past show that the first weeks don't always set the tone for the year: take 2018, which started with what we can now call exuberant trading.

Demand to short shares is picking up, with interest especially high for old favourites like Sunac China Holdings Ltd, Country Garden Holdings Co and China Evergrande Group (Morgan Stanley, incidentally, turned bullish on the Chinese property sector this week).

Some traders say convertible-hedge positioning - a lock-in trade favoured by hedge funds - is driving demand. Such positioning, which generates yield by buying a firm's convertible bonds and selling the underlying shares short, is a market-neutral stra-tegy and not necessarily a bearish bet.

Still, the rush of activity - and otherwise muted volumes as markets reopened for the year - meant that shortselling turnover surged to almost 19 per cent of all value traded in the city, the highest since 1998.

With data showing that manufacturing contracted for the first time since mid-2017, sovereign debt could remain the place to be in January. The 10-year yield fell towards 3 per cent and futures rose for six straight days, the longest stretch since May.

While havens sold off on Friday after confirmation that the US and China would hold face-to-face talks next week, analysts predict the rally has room to run as Beijing steps up stimulus and injects more liquidity before the Chinese New Year, as evidenced on Friday.

Foreign investors have been betting on that, increasing their holdings of onshore Chinese debt last month by the most since June. BLOOMBERG