Short Sellers Battle Mainland Buyers in Hong Kong's Stock Market

(Bloomberg) -- 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% of total turnover this week, the highest proportion since at least 1998, based on a five-day moving average. That’s not deterred mainland investors, who were net buyers of Hong Kong stocks via exchange links for the 21st day on Friday.

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

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% 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 and easy place to do business and shop. There is now serious debate about whether Beijing will use military measures to quell the protests after stationing troops in a stadium across the border.

Companies are falling foul of the newly politicized environment. Cathay Pacific Airways Ltd. shares plunged after being singled out by Chinese entities for not sufficiently punishing employees sympathetic to the demonstrators. The airline, which has since fired staff who’d been suspended in relation to the protests, announced Friday that Chief Executive Officer Rupert Hogg had resigned "to take responsibility as a leader of the company in view of recent events."

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

Mainland investors have kept the faith, however, purchasing a net $5.8 billion of Hong Kong stocks in the past 21 sessions, the longest run of inflows since February 2018. They bought the most in nearly 18 months on Friday.

©2019 Bloomberg L.P.