The Hang Seng Index hit a two-and-a-half-year low yesterday amid fears of global recession, with short selling of Hong Kong stocks now the highest in terms of turnover since 1998.
The Hong Kong benchmark plunged 770.26 points, or 4.38 per cent, to close at 16,822.15 points - underperforming the rest of Asia.
Apart from South Korea, which gained 0.02 per cent, Taiwan lost 2.93 per cent, Australia dropped 2.78 per cent and Japan fell 1.78 per cent.
Stock markets on the mainland are closed this week for the National Day holiday.
Ping An Insurance was the biggest loser in the Hang Seng Index yesterday, plunging 13.35 per cent to close at HK$38.30.
Banking stocks continued their losing streak. Bank of East Asia declined 7.45 per cent, Bank of Communications dropped 7.04 per cent and Bank of China fell 6.53 per cent.
The index is now trading at 9.19 times estimated earnings this year after a series of investor sales over fears of a global recession and a possible liquidity crisis triggered by the euro zone's debt woes.
Castor Pang, head of research at brokerage firm Core-Pacific Yamaichi, said despite Hong Kong stocks being relatively cheap buyers had stayed away.
'Whenever there's a rebound, there's another round of short-selling,' said Pang. 'Unlike other markets, there is no ban on short selling in Hong Kong. Right now, risk aversion is very high. People want to keep cash and they don't want exposure to equities. There's little capital inflow to support the market.'
Greece was the first country to ban short selling and the practice, which involves borrowing shares, selling them and buying them back later at a lower price, has been blamed for roiling markets.
Belgium, France, Italy and Spain have also imposed restrictions on short selling in a bid to curb wild swings in their stock markets.
Short selling now constituted about 14.1 per cent of total stock market turnover in Hong Kong, according to research by French investment bank Societe Generale.
Investors have turned bearish since the beginning of this year. According to London-based research company Data Explorers, long positions on Hong Kong stocks outnumbered shorts by just over five times, less than half the annual high in January.
The research company attributed the fall to a rise in the value of stocks on loan and a decline in institutional ownership.
Analysts said credit tightening on the mainland had also weighed on banking and property stocks, making them targets for short sellers.
There are concerns that smaller and weaker property firms, which borrowed heavily to expand aggressively, could run into liquidity problems.
This was one reason why the stock of mainland property developers saw strong interest from short sellers.
Figures from Data Explorers - which collects securities lending figures from investment banks, hedge funds, prime brokers and lending agencies - showed that among 300 Hong Kong stocks, short interest was most prominent for Poly (Hong Kong) Investment, China Resources Land, China Overseas Land and Investment, Hopson Development Holding and KWG Property Holding.
Analysts believe Hong Kong shares are likely to be further depressed this week.
The number of constituent stocks on the Hang Seng Index
- The index is divided into four sub-indices based on business sector