Short sellers feast on Hong Kong stocks as China investors brace

[HONG KONG] Hong Kong's stock market has barely ever been this bearish.

Short-selling turnover soared to almost 18 per cent of the total value of shares traded in the city Thursday, exchange data compiled by Bloomberg show. Such dominance has only been once in the past 20 years, in May 2016. The Hang Seng Index closed 1.7 per cent lower to cap its worst three-day rout since early February, when a US volatility spike sent shockwaves across global markets.

Bears are returning to target the city's equities and currency after being blindsided by a painful short squeeze last month, with this week's declines putting the Hang Seng gauge on course for its worst year since 2011. Concern that a trade war will aggravate an economic slowdown in China is weighing on the city's stock market, while a currency peg with the US means the city will be forced to follow the US's tightening path.

The Hang Seng gauge fell into a bear market last month, following benchmarks on the mainland. Hong Kong's bad week sets the tone for stocks across the border in China, where trading will reopen Monday after a week-long holiday break.

The Hang Seng Index was down 0.3 per cent at 9:45am, taking its loss this week to 4.5 per cent, the worst on a closing basis since February.

With at least 14 per cent of their outstanding shares sold short, Great Wall Motor Co, BYD Co and Angang Steel Co are among the favorite targets for bears in Hong Kong. Their shares have lost more than 4 per cent this week, according to IHS Markit data.

BLOOMBERG