The Hang Seng Index, one of the worst-performing markets in Asia with a 14% decline since January, is showing signs of increased momentum, with traders citing a short squeeze as one of the drivers of the price rise. The Hang Seng Index increased by 3.6% last Thursday, the biggest in four months.
The reason could be that the traders are busy covering their shorts i.e the sold positions. A situation like this arises when the price begins to rise contrary to a short seller’s position. When prices begin to rise, a short squeeze supported by massive volumes frequently sends stock values rocketing higher.
Short-selling activity on the Hong Kong stock exchange is at an all-time high, which might lead to a sharp increase in share prices if investors rush to close out their holdings. On Tuesday, the number of pessimistic bets traded as a percentage of all trades on the Hong Kong stock market reached a record high of 23%. Tech names were among the most-shorted shares, with Tencent Holdings Ltd.’s levels nearly doubling to 31%, while Meituan’s rose to 28%.
Concerns about Chinese companies being delisted from the US stock market mellowed down once the news about the US-China agreement allowing audits of firms in mainland China and Hong Kong broke out. Investors of Chinese companies listed on the New York Stock Exchange will now have something to cheer about.
Recently, the Public Company Accounting Oversight Board (PCAOB) signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S. Law.
In late 2020, the U.S. Holding Foreign Companies Accountable Act (HFCAA) came into force. The HFCAA permits the U.S. Securities and Exchange Commission to delist Chinese businesses from American markets if American regulators are unable to assess company audits for three years in succession. This means that the 2024 deadline set by Congress for delisting non-compliant corporations from the US stock market is getting closer and closer.
( With inputs from Bloomberg)