Hong Kong shares up; Shanghai dips

Hong Kong's benchmark index edged higher on Thursday led by financials on optimism over earnings though its failure to breach a crucial technical indicator has triggered concerns about near-term weakness. The benchmark Hang Seng closed up 0.3 percent at 23,122.4, after rising as high as 1 percent by midday, supported by short-covering in large-caps that were built over the week.
It failed to rise above the downward trendline, that was established when it rose to a high of 24,430 in January. The trendline, currently at 23,300, has capped the index several times since, data shows. The Shanghai Composite Index edged down 0.4 percent to end the day at 2,903 but financials outperformed with the sector sub-index rising for the seventh straight day to close up 1.3 percent.
"Funds are buying up relatively cheap bank stocks before they announce earnings in a few weeks," said Cheng Yi, analyst at Xiangcai Securities in Shanghai. The financial sector saw the biggest upward revisions in 12-month forward earnings in the past 30 days, according to Thomson Reuters Starmine, among the 10 sectors tracked.
China Merchants Bank shares extended a five-day upward streak, gaining 4.2 percent with trading volumes at 5.6 times the stock's 30-day average in Shanghai and the highest volume since May 2009. Its Hong Kong-listed shares rose 2.3 percent also on healthy volume.
Daiwa capital trading strategist Patrick Lee said China Merchants was a "high beta play" on Chinese banks, which he recommended as a sector. A high beta stock is one that is more volatile relative to the sector or benchmark and hence is expected to generate higher returns in an uptrend. Lee said that the Shanghai Composite had shown significant strength despite wild gyrations in global stock markets, which signals that Chinese shares may be poised to outperform. The Hang Seng failure to breach the downward trendline suggesting weakness ahead, has made traders cautious.
A trader at a large European bank in Hong Kong, said activity on the day was largely driven by futures while large model-driven institutions were still outright short. On Wednesday, short-selling as a percentage of total turnover in Hong Kong hit 8.1 percent, its highest this year, prompting some market players to cover bearish bets on Thursday morning as markets rallied.
HSBC Holdings Plc , down nearly 7 percent over the past three days as retail investors dumped warrants after the bank's tepid forecast, saw short-selling hit 20 percent of total daily turnover on Wednesday. On Thursday, HSBC shares closed up 0.4 percent. Hong Kong-listed Chinese companies were clear outperformers on the day, with the main H-share gauge the China Enterprises Index , up 1.2 percent, led mostly by financials.
China Construction Bank and ICBC , the two biggest banks in the sector, were up a percent. Bernstein Research analyst Mike Werner who raised his forecast for full year earnings for Chinese banks to reflect expanding net interest margins as a result of recent interest rate hikes. "We believe some investors are focusing too much on the decelerating 2011 loan growth. Instead, we argue investors should focus on the improving profitability of the banks." said Werner in a note to clients.