Shorts Hanging With The Hang Seng

Year to date, Hong Kong's benchmark Hang Seng Index is down almost 11 percent, and over the past six months, it is down nearly 19 percent. Therefore, it probably is not surprising that short sellers are sinking their teeth into Hong Kong-listed stocks.

Global investors' lack of enthusiasm for Hong Kong stocks is reflected in the iShares MSCI Hong Kong Index Fund (ETF) EWH and the iShares FTSE/Xinhua China 25 Index (ETF) FXI. FXI, the largest U.S.-listed China ETF, holds stocks that trade in Hong Kong, on mainland China and in New York. EWH and FXI are down 11.6 percent and 14.2 percent, respectively, year-to-date. The MSCI Emerging Markets Index is off 6.9 percent.

Chinese Markets

As Chinese stocks have tumbled in recent months, investors have endured situations such as days where half the stocks trading on the mainland where halted by Chinese regulators and ineffective market interventions, a tool Beijing has since told market participants that they should not become too dependent on.

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“With multi year lows in the indexed level of both China and Hong Kong listed equities, investors have yet to be enticed back. Aggregate outflows across foreign listed ETFs exposed to the region have seen $460m of outflows year to date,” said Markit in a recent note.

Recent Performances Of EWH And FXI

In the United States, FXI has bled more than $90 million, but at $386.1 million, EWH's year-to-date outflows are more than triple the departures from FXI. The declines and the outflows appear to be emboldening short sellers.

“Short sellers look to have caught the recent Hang Seng selloff, with short interest in the larger companies comprising the index with a significant 23 percent increase in shares outstanding on loan to just above 1.0 percent,” said Markit.

As the research firm noted, shorts sellers of Hang Seng are particularly fond of real estate stocks. If those wagers prove accurate, that is not good news for EWH, because the $1.74 billion ETF allocates nearly 26.3 percent of its weight to real estate stocks. That is almost 900 basis points more than EWH devotes to insurance stocks, the ETF's second-largest industry allocation.

Tencent Holdings Ltd TCTZF is one of the individual names most targeted by Hong Kong bears. FXI allocates 9.8 percent of its weight to the Chinese Internet giant, making the stock the ETF's largest holding.