Hong Kong stocks posted their best daily gains in three months as short sellers closed their bets on Chinese internet groups and some investors bought shares hoping a prolonged sell-off in Chinese stocks had been overdone.
The sudden rebound in the Hang Seng index caused it to rise 4 percent on Friday. That was the best day for the Hong Kong stock meter since early March and followed weeks of selling that pushed the benchmark nearly 20 percent lower from its peak in January and into a bear market.
Friday’s rally was led by Chinese internet stocks, with the Hang Seng Tech index rising 5.3 percent. Tencent and Alibaba closed 6 and 6.7 percent higher in Hong Kong, respectively.
Those gains followed a sudden rally for Chinese tech stocks on Wall Street, where shares of Tencent rose 4.5 percent and the Nasdaq Golden Dragons index that tracked major Chinese companies ended the session up 4 percent.
A trader at a Wall Street bank noted gains for Tencent during US trading on Thursday, shortly after the release of a Citigroup research note. The note marked that US Tencent certificates had fallen to nearly the same lows most investors had bought back late last year during a reopening rally for Chinese stocks.
“We would expect (investors who bought Tencent shares in December) to slow the pace of the stock’s declines and provide some support at these levels,” Mohammed Apabhai, Global Markets Head of Asia Trading Strategy at Citi, wrote in the statement. note.
Such a wave of support for Chinese internet stocks could prompt short sellers targeting Tencent and similar companies to close their positions, a practice known as “short covering”. the rally.
“I have piles of buy orders, but it’s all shortcovering,” said the chief trading desk of a Chinese broker in Hong Kong. “It’s not just buying for long and the big global guys aren’t involved. . . there is nothing fundamental about this rally.”
Dickie Wong, head of research at Hong Kong-based Kingston Securities, said there is “no doubt some of this is shortcovering”.
Wong said other drivers of the rally were Thursday’s reading on Chinese factory activity, which beat economists’ estimates, as well as growing expectations in global markets that the US Federal Reserve would not raise rates at its June meeting.
However, he was pessimistic about the likelihood of Friday’s gains lasting more than a few sessions – if at all.
“Generally speaking, when we talk about the mainland China economy, most of the recent data points have been worse than expected,” Wong said. “I don’t see much benefit.”