Hong Kong Stocks Draw Short Sellers' Attention

The iShares China Large-Cap ETF (NYSEArca: FXI), the largest U.S.-listed exchange traded fund tracking Chinese stocks, is down more than 14.7% year-to-date and it looks like some traders are betting on more declines for some of the stocks held by FXI and rival China ETFs.

On Tuesday, hinese equities rebounded after data revealed the country’s banks issued a record amount of loans in January, Bloomberg reports. Moreover, supporting the flagging economy, Beijing is expected to release a package of measures to ensure growth hits its targets this year. Due to the recent economic weakness, investors have been selling Chinese equities, which has fallen the most among global markets after Greece’s this year.

“Short interests in Hong Kong stocks have surged this year while overseas investors cashed out on ETFs, data provided by Markit shows,” reports Shuli Rhen for Barron’s. “Hong Kong’s benchmark Hang Seng Index has fallen by about a third from its peak in 2015 but cheap valuation has not deterred shorts. This year, short interest in the Hang Seng Index’s stocks have increased 23% with shares outstanding on loan to just above 1%.”

Chinese company stocks that trade in Hong Kong are not a perfect way of expressing views on China as there is a limited pipeline between Hong Kong and Shanghai, which restricts efficient arbitrage between the two markets. The the two markets, though, are beginning to open up through the new stock connect program.

Consequently, despite the horrible start to the new year, China A-shares are still trading at a 40% premium to their Hong Kong-listed H-shares counterparts – the Hang Seng China Enterprise Index shows one of the cheapest valuations in the world at six times expected earnings.