Hong Kong shares jump, China posts worst week in 11 months

Hong Kong shares jumped on Friday, recovering the bulk of the week's losses and shrugging off a weak Shanghai market that posted its worst weekly loss in eleven months as tight liquidity in the financial system continued to weigh on sentiment. A rally in Petrochina shares and short-covering in large-caps lifted the Hang Seng index above its 200-day moving average, while trading volumes improved, a sign that the market may have seen its lows for now.
The Hang Seng index closed nearly 1 percent higher at 23,118 points, paring its weekly loss to 0.3 percent. The China Enterprises Index of top locally listed mainland firms rose 1.6 percent. Petrochina jumped 3.8 percent and was the top contributor to the Hang Seng as investors rushed in to buy on news that its parent China National Petroleum Corp (CNPC) had raised its stake in the company and planned to buy more stock.
Shares of offshore producer CNOOC rose 2 percent as crude oil prices rose. Banks also outperformed as attractive valuations continued to draw in investors. Industrial & Commercial Bank of China, which is trading at a 28 percent discount to its historical forward 12-month earnings multiple according to Thomson Reuters Starmine data, rose 1.8 percent.
Gains were also driven by a bout of short-covering after short sales in Hong Kong rose to as much as 10.4 percent of total turnover earlier this week, data from the exchange showed. A trader at a European bank said short-covering along with futures buying by commodity trading advisers (CTAs) lifted the Hang Seng beyond the 23,000 level. Near-month futures on the index, which expire on Monday, flipped to a slight premium over spot prices in the afternoon.
Bucking the broader positive trend, shares of consumer goods exporter Li & Fung shed nearly 7 percent, before recovering to end 2.6 percent lower, on concern over its earnings growth outlook. The shares have lost over 17 percent after a 2-for-1 stock split that took effect last week, with traders attributing the sharp drop to additional liquidity in the stock that allowed investors to exit positions.
But with shares sitting around HK$15.70, the 50 percent retracement level of their entire move up from an October 2008 low to their January 2011 record high, traders said the stock could find support. "If you were lucky, or smart, enough to be short the name, probably not a bad idea to pick a little bit up here, cover some of the short, in anticipation of the technical bounce which could occur in the not too distant future," said a Hong Kong-based trader at a Japanese bank.
Shanghai's benchmark index finished down nearly 1 percent at 2,709.9, taking its losses for the week to 5.2 percent. Support is next seen at 2,650, its 61.8 percent retracement from the benchmark's November 2010 high. It is now trading down 3.5 percent for the year as A-share turnover on Friday remained almost unchanged from Thursday's levels, reaching about 91.5 billion yuan.
Petrochina's Shanghai-listed shares rose 0.8 percent, limiting losses for the benchmark, but those gains were unable to offset weakness in small caps. Even though Chinese money markets fell on Friday, its benchmark rate, the seven-day government bond repurchase rate, remained at a high level of more than 4 percent, indicating the liquidity crunch may still last for a few days until after the end of May.
Both key small cap sub indices underperformed the broader market, with the CSI500 Index down by 3.2 percent and the Shanghai small cap sub index down 2.8 percent on the day. Sanyuan Foods was among the biggest small cap losers, down by a maximum 10 percent.