Hong Kong shares slumped on Friday and may fall more in the near-term, thanks to increased volumes of short-selling as long-term investors look to enter the market given this month's sharp price-drops. Losses were exacerbated on Friday as European and United States stock futures traded sharply lower, with markets remaining fragile after fresh data on Thursday renewed recession fears in the US, with lingering weakness in European banks compounding matters.
"The market's just flushing out some of the optimism that's still there," said Tan Eng Teck, a Singapore-based investment manager at Treasury Asia Asset Management. "China is now looking quite attractive, we are actually looking quite aggressively into it."
The Hang Seng Index slipped 3.1 percent to 19,399.9 points, with near-term support seen between its May 2010 low near 19,000 and 19,300, its close on August 9. Short-selling remained high at more than 11 percent of total turnover at midday, suggesting that some market players were betting on further declines even after a 13.5 percent fall on the Hang Seng benchmark in August.
For the three months ended on Thursday, short-selling accounted for 8.5 percent of average daily turnover. Hong Kong's fall has been its biggest three-week decline since January 2009. If losses deepen next week, the benchmark could be poised for its worst monthly performance since October 2008, when it plunged 22 percent.
Top beta plays on the Hang Seng saw some of the bigger percentage losses as investors exited names with a high correlation to the benchmark indexes, meaning they are more likely to get caught up in violent market moves. Aluminium Corp of China Ltd (Chalco) dropped almost 8 percent, while shipping terminal operator Cosco Pacific Ltd lost 5.5 percent.
HSBC Holdings Plc, Europe's largest bank and the biggest weight on the Hang Seng, was the benchmark's top drag, retreating 4.2 percent, closing at a fresh two-year low. The Shanghai Composite Index lost almost 1 percent on the day and 2.3 percent on the week to finish at 2,534.4 points on Friday, recording its fifth-straight weekly loss but outperforming Asian peers on a bad day for the region.
Capital controls mean that China's markets are largely closed to foreign inflows and therefore more insulated from any associated volatility than regional peers. Only a limited number of foreigners can invest in the mainland A-share market through licensed brokerages.
The Shanghai Composite is down 6.2 percent in August to date, and could post its worst monthly performance in more than a year. It lost 7.5 percent in June last year. Cyclicals were the top drags, with energy issues dominating. The Shanghai energy sub-index lost 1.9 percent with China Shenhua Energy Co Ltd declining 1.8 percent.