Hong Kong shares slip, Shanghai rise

Hong Kong shares flipped into the red on Tuesday as market players pared long positions after China announced a sixth hike in banks' reserve requirements this year to drain excess liquidity and tame inflation. China's inflation accelerated in May to a 34-month high of 5.5 percent, supporting the case for tighter monetary policy with inflation remaining the top priority for China's leaders.
Financial stocks on the mainland , which had closed up more than 1 percent before the rate increase was announced, could see a backlash on Wednesday. Keilland added short-term rates, which are already tight, are likely to spike even higher putting further pressure on Chinese banks to find funds.
This is likely to put more pressure on the financial sector which has seen a steady pick-up in short-selling this month. Despite earlier gains on the day, short-sellers were not seen moving in to cover positions suggesting several market players remained bearish on the sector. The benchmark Hang Seng Index closed down 0.1 percent at 22,496 with turnover, which was relatively light by midday, accelerating as losses deepened. Hong Kong's main stock index is seen trapped between support at its March low of 22,123 and resistance at the 250-day moving average, currently at 22,646.1 which it tested intra-day on Tuesday.
A break of either of these levels accompanied by a pick-up in trading volumes will likely set the tone for the market over the lean summer months. The risk of a "short squeeze," a rush to cover bets, had risen if markets were to bounce from current levels, with counters such as Agricultural Bank of China, the top performing large cap banking stock this year, a possible candidate for such a move, traders said.
Agbank shares, up 7.2 percent this year compared with a 3 percent decline for financials in Hong Kong, has already seen short interest come down to about 10 percent on Monday compared with as high as 32 percent a week ago. China shares gained broadly on Tuesday, boosted by May inflation data that fell largely within expectations and reports that property investment in China quickened in May.
Strong real estate investment helped support China's overall economic growth in May, as a flurry of data on Tuesday showed the world's second-largest economy is slowing but not as much as expected, although inflation accelerated to a 34-month high. China's annual real estate investment growth sped up to 34.6 percent in the first five months, from a rise of 34.3 percent in the first four months, the National Bureau of Statistics said on Tuesday.
The benchmark Shanghai Composite Index traded up 1.1 percent to 2,730.0 on Tuesday, extending its bounce from around the 2,680 level from which the index staged a strong rally in January as Shanghai A-share turnover hit a three-week high, hitting 94.8 billion yuan. Property giants Poly Real Estate and China Vanke Co Ltd gained 6.8 and 3.4 percent in 3.3 and 2.4 times their 30-day average volume respectively. Those gains helped the Shanghai property sub-index extend its outperformance against the broader market so far in June, gaining 4.0 percent compared to the 0.5 decline on the benchmark Shanghai Composite Index.