Mainland companies have become short-selling targets as investors bet a slowdown in the economy and concerns over corporate governance will hurt market sentiment.
Several initial public offerings of mainland firms have been shelved or reduced in Hong Kong, with the latest, Beijing Jingneng Clean Energy, last night postponing its listing plan.
According to Data Explorers, a financial data provider, the 10 most shorted Hong Kong stocks are all mainland companies, and mainly in the consumer goods or food sectors.
Top of the list was Chaoda Modern Agriculture Holdings, which had 20.15 per cent of its outstanding shares on loan as of Tuesday. Food processor China Yurun Food Group was ninth, with 9.43 per cent.
A short-seller borrows stock and then sells it in the market; the aim is to buy it at a later date at a lower price so that the security can be returned to the lender.
Both local and international investors are increasingly bearish on privately-held mainland companies. The Hong Kong market is the shortest since August last year. The long-short ratio for Hong Kong equities stands at 7.6, and has steadily declined since the end of January, when the ratio was 11.6. The lower the ratio, the shorter the market is.
Short interest in US-listed Chinese stocks has doubled since the beginning of the year to well over 6 per cent of total shares out on loan, following the spate of fraudulent accusations against these companies, including Sino-Forest. Short interest in Hong Kong-listed mainland stocks has been increasing since the end of last December, from 0.81 per cent to 1.34 per cent as of June 16.
Haitong International Securities strategist Edward Huang said mainland private companies were easy targets for short-sellers who wanted to ride on bearish market sentiment, especially when these companies did not have a strong business presence in Hong Kong.
He also pointed to the lack of transparency in company management and obscure accounting practices, especially in the food and agriculture sectors. He said food and agriculture companies could continue to be overshadowed by such concerns due to the difficulty in vetting the quality of the companies' assets.
Banny Lam, associate director of the economic research division at CCB International, agreed that these two sectors were more susceptible to market speculation. He noted it was difficult to track down connected transactions between the upstream and downstream food companies because of the scope and complexity of the business, which at times involved many tiers of government.
Lam said mainland hi-tech stocks could experience another cycle of price correction as most had yet to produce a proven track record of profitability and were low on cash. Skyworth Digital Holdings, a mainland digital television manufacturer, was among the top 10 most shorted stocks in Hong Kong.