Hong Kong shares gained 1.6 percent on Wednesday, with the Hang Seng Index closing at the highest in three weeks, but weak turnover and strength in defensive names pointed to lingering caution ahead of a eurozone summit later this week. Financial stocks, which were among the top laggards on Tuesday, were particularly strong. The mainland's top insurer, China Life Insurance, gained 4.3 percent, while HSBC Holdings Plc was up 1.9 percent.
Turnover has been sluggish with warrants and callable bull/bear contracts accounting for a large percentage of volumes. "It's been a very derivative-driven market, accounting for about 40 to 45 percent of turnover. Short term investors are trying to grab every small magnitude of change," said Alex Wong, Ample Finance Group's director of asset management.
On Wednesday, the Hang Seng Index closed at 19,240.6 points, breaking above a 370-point range that the benchmark had traded in over the past four sessions. Chinese shares listed in Hong Kong were relative outperformers, with the China Enterprises Index up 2.2 percent.
The mainland's top lender, Industrial and Commercial Bank of China (ICBC), was among the top boosts to the Hang Seng Index, rising 2.9 percent. It is trading at 6.1 times forward 12-month earnings, a 45 percent discount from its 10-year median. While cheap valuations have not attracted investors for most of this year, that has started to change after Beijing's cut in reserve requirements for commercial lenders last week, its first in three years.
Officials have described the move as a "fine-tuning" of current policy rather than a shift to an easier monetary stance, leading some investors to remain focused on safety in more defensive sectors despite their relatively higher valuations. Power-generation company CLP Holdings Ltd gained 0.8 percent. It is trading at 14.4 times forward 12-month earnings, 16 percent above its 10-year median.
A wave of stock offerings that could raise as much as $7.61 billion is set to hit Hong Kong in coming days. The heavy rush to sell shows that companies worry that market conditions could get worse in 2012, especially if Europe's debt woes are not contained.
Scepticism that China's reserve-rate cut represents real monetary easing has also hit mainland markets, with the Shanghai Composite Index having lost its gains since last Thursday in steadily declining turnover.
On Wednesday though, the Shanghai benchmark snapped a three-day losing streak, as strength in financials helped it finish up 0.3 percent at 2,332.7 points, with A-share turnover slumping to a fresh 2011 low. Shares of China's top two insurers were among the benchmark's leading boosts. China Life gained 0.8 percent, while its small rival Ping An Insurance was up 3 percent.
With the performance of the mainland stock market tied to liquidity, recent bearishness can be attributed to hot money flowing out of China, a trader at an American brokerage in Hong Kong said. While the hiked reserve requirements throughout 2011 helped sterilise forex inflows, last week's cut is keeping pace with liquidity withdrawals, the same trader said, warning that weakness in onshore markets could soon spill over to Chinese shares listed in Hong Kong.