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Short-sellers battle mainland buyers in Hong Kong market

Short-selling volume on the main board hits 17% of total turnover; mainland investors the net buyers of HK stocks for 21st day

Mainland investors have purchased a net US$5.8 billion in Hong Kong stocks in the past 21 sessions.

Hong Kong

IT'S turning into a struggle of wills between bears betting against Hong Kong equities and mainland Chinese investors.

Short-selling volume on Hong Kong's main board climbed to 17 per cent of total turnover this week, the highest proportion since at least 1998, based on a five-day moving average. This has not deterred mainland investors, who were net buyers of Hong Kong stocks via exchange links for the 21st day on Friday.

So far, the bears have been winning. The benchmark Hang Seng Index has tumbled by about 15 per cent from its April high to be among the world's worst performers; selling momentum this week was the strongest since China's currency devaluation four years ago. Mainland buyers are seeing some success though - the gauge rebounded 1.8 per cent in the three days through Friday.

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To be sure, previous surges in the short-selling ratio haven't been a great indicator for future moves. Back in 2016, a spike was followed by an almost 70 per cent rally. But the pessimistic case for Hong Kong shares is easy to sketch.

The city is facing one of its worst crises in decades as increasingly violent protests mar its image as a safe, easy place to do business and shop. There is now serious debate about whether Beijing will use military measures to quell the protests; troops have been stationed in a stadium across the border.

Companies are falling foul of the newly politicised environment. Cathay Pacific Airways shares plunged after being singled out by Chinese entities for not sufficiently punishing employees sympathetic to the protesters. The airline has since fired two pilots who had been suspended in relation to the protests. Its shares have rebounded.

The trade war with the US is also hurting the local economy, and damping demand for Chinese companies listed in Hong Kong. A weak yuan is adding further pressure.

But mainland investors have kept the faith, purchasing a net US$5.8 billion in Hong Kong stocks in the past 21 sessions. They bought the most in nearly 18 months on Friday. BLOOMBERG