Short bets on Hong Kong stocks have hit a historic high. The trade has been a profitable one so far, with the city’s benchmark Hang Seng index down nearly a quarter in the past year. That has made short selling Hong Kong stocks look a surer bet than it really is.

Short-selling trades as a proportion of the total turnover on the Hong Kong’s stock market this week climbed to a record 23 per cent this week, according to Bloomberg data.



Much of the bearishness is justified. Regulatory risks remain high for the Chinese tech groups that dominate the city’s benchmark index. Their prices have also been dragged down by the fear that their American depositary receipts will be compulsorily delisted.

Big investors have been reducing their exposure. Warren Buffett’s Berkshire Hathaway has just trimmed its stake in Hong Kong-listed Chinese electric carmaker BYD. The move triggered a disproportionate drop in the shares.



Still, the large volumes of shorts are surprising. Hong Kong restricts the activity. Naked shorting — selling shares that traders do not own or have not borrowed — is banned. This means short sellers have to pay up to borrow the stock. Returns on successful short sales are correspondingly lower than in markets such as the US. An uptick requirement means short sales must be made at a higher price than the previous trade.

Hong Kong’s short sellers are now vulnerable to short squeezes. Trading volumes in Hong Kong have fallen in recent months, increasing the potential for sharp, hair trigger price movements. The main targets of the short bets have been big Chinese blue-chips. These popular names, which include giants such as Tencent and Alibaba, have large, loyal, long-term retail investor bases. That makes covering short positions pricey.



The Hang Seng index, which now trades at just 0.8 times book value, looks dirt-cheap compared with regional peers. The lower the valuation of Hong Kong stocks fall, the higher the risk of a short squeeze in coming weeks.

Tencent has reined in its once aggressive pursuit of Chinese internet companies, sending a chill through an industry already reeling from a regulatory onslaught.

The Shenzhen-based internet giant and owner of the popular messaging app WeChat has outlined a strategy internally to divest about Rmb100bn ($14.5bn) of its $88bn listed equity portfolio, according to two people familiar with the matter.

The soft target is part of a broader shift by Tencent to reduce costs as economic growth slows amid a property crisis and zero-Covid restrictions in China. The pivot represents a tidal change for start-ups in the internet and consumer sectors raised on cheap capital from deep-pocketed investors.

“Tencent has been a powerful investment force. Their vast capital meant they took risks that others couldn’t,” said Li Chengdong, head of internet think-tank Haitun in Beijing. “Tencent gave life to the entire venture capital community.”

The company has a larger war chest and longer investment horizon than most venture capitalists and is one of the critical providers of follow-on investment rounds. As a result, changes in its strategy will have a knock-on effect throughout the industry.

Funding for Chinese start-ups has declined. Beijing-based data provider ITjuzi found that start-up fundraising fell by 38 per cent in the first half of the year, with the number of deals down 19 per cent compared with last year.

Lulu Yilun Chen, author of Influence Empire: The Story of Tencent & China’s Tech Ambition, said: “Tencent channelled so much money into start-ups, creating a vibrant ecosystem where entrepreneurs experimented with business models and battled it out for market share.”

“That era has gone after the regulatory crackdown and as Tencent’s focus has shifted with the wider economic slowdown,” Chen added.

Tencent’s move to scale back its spending and divest large chunks of its portfolio is representative of a broader shift in the industry, said Li. “This is an inflection point for consumer and internet companies.”

Tencent’s investments in listed companies, excluding subsidiaries, totalled Rmb602bn at the end of June, falling from Rmb726bn in the same period in 2020, following a rout in Chinese tech stocks.

“We can’t keep providing unlimited support. We’re selecting companies that can sustain themselves,” said one Tencent employee with knowledge of the company’s investment strategy.

The person added that Tencent had been asked by investors to divest its underperforming assets and the shift was testing the boundaries of the investment team. “We’re having to think in a way that we’ve never thought before,” the employee said.

Tencent’s outsized role as a backer of China’s internet companies has attracted the scrutiny of regulators, seeking to break up the monopolistic grip of the country’s top tech titans.

The company is the largest investor in food delivery giant Meituan, ecommerce titan Pinduoduo, online brokerage Futu and video-sharing app Kuaishou.



One Shenzhen official working for the local branch of the anti-monopoly agency said Tencent used the combined power of its universal messaging app WeChat and its deep pockets to support its portfolio companies.

“Consumers are paying the price for the way Tencent created a protective ecosystem for its portfolio companies,” the official said, pointing to how WeChat blocked users from sharing links to the competitors of services in which it had invested. The official said regulators had instructed Tencent to divest stakes in large tech companies.

Tencent said: “We [have not] received any external pressure regarding our investment portfolio . . . We will continue to make decisions independently and in the best interest of our shareholders over the long term.”

One official at the Guangdong office of the anti-monopoly agency, involved in probes into Tencent’s sprawling tech empire, said: “Tencent has a monopoly grip over gaming, instant messaging and entertainment. The company has been very humble when dealing with the regulators. Still, we are looking for actual moves like a Rmb100bn donation [to the poverty alleviation fund] or selling stakes in listed companies.” 

Tencent plans to pare back stakes in companies, including ecommerce player JD.com and Meituan, said one investment team member. Two people with knowledge of the matter said Meituan was not at the top of the investment team’s sell list.

“In the following months, Tencent will keep executing sales of listed shares, including but not exclusively Meituan,” said one person with knowledge of the matter. Their views were echoed by two members of the Tencent investment team.

Reuters previously reported that Tencent plans to sell all or much of its $24bn stake in Meituan. Tencent said during an earnings call in August that the report was “not accurate”.

Tencent added: “We don’t have any target amounts for divestments. We have always invested with the goal of generating strong returns for our company and shareholders, not according to any arbitrary timeline or target.”

Investments in China’s tech sector have not stopped altogether. In August, Tencent’s corporate venture arm invested in agriculture, robotics, semiconductor and vaccine technology companies — all sectors singled out by Beijing as critical for the country’s drive to become self-reliant in science and technology.

The Shenzhen official said that Tencent’s success in investing in China’s booming tech growth meant the company needed to contribute by financing companies in sectors that the government backed.

“Tencent should shoulder some responsibility,” they said, adding that the company “may profit less with this change of investment strategy”.