Shorts hit Hong Kong shares

Shorts hit Hong Kong shares

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Short positions in Hong Kong stocks have surged this year while overseas investors cashed out of ETFs, data from Markit shows.

The Hang Seng index - which tracks Hong Kong-listed Chinese companies - has fallen 16% year-to-date, more than double 2015’s decline of 7.2%.

There are multiple reasons for the market's drop, as William Fong, lead manager of Baring China Select Fund, outlined a recent note.

“Concerns over a weaker HK dollar, the Fed's decision to raise interest rates and the unsettling effect of the new “circuit breaker” in the Chinese market have all played their part," he said.

With stocks at multi-year lows, outflows across foreign listed ETFs exposed to the region have surged to $460m year-to-date.

Meanwhile, Markit data shows that short interest in the larger companies comprising the index has risen, with a 23% uptick in shares outstanding on loan.

Real estate firms remain the most shorted by value with software and services the second highest shorted sector in Hong Kong by aggregate value on loan.

The most shorted stock (above $500m in market cap) currently is Yanzhou Coal Mining with 12% of shares outstanding on loan and the stock losing 19% year to date.

Despite both Yanzhou Coal Mining and China Coal Energy falling more than 40% in the last 12 months, demand to borrow both remains high.

“This indicates strong levels of conviction among those still willing to go short,” said Markit analyst Relte Schutter.

China Coal Energy has fallen 20% year to date with 9.5% of its shares currently out on loan.

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