Hong Kong shares jumped on Friday on gains in higher beta names, helping the Hang Seng Index surge almost 9 percent in two days to rebound from a 29-month low reached earlier this week.
The benchmark also posted its first weekly gain in five as investors covered short positions on a more stable global market, suggesting that the hedging against the risks of a hard landing in China over the past week appears to be overdone.
Complete data for Friday was not immediately available at market close, but short-selling has accounted for over 10 percent of daily turnover in all but one of the last nine sessions.
It's too negative to short the market further unless you expect a total collapse in earnings, said Peter So, CCB International's co-head of research.
Many industries are still seeing double-digits earnings growth, it's too risky to be in a short position when they report earnings later this month, So added.
The Hang Seng Index closed up 3.1 percent on the day and 0.7 percent on the week at 17,707.0 points, while the China Enterprise Index closed up 3.7 percent on the day but down 0.3 percent on the week at 8,887.5 points.
Hong Kong ports-to-telecoms conglomerate Hutchison Whampoa Ltd surged 10.5 percent in more than twice its 30-day average volume, topping percentage gains among Hang Seng components.
The stock has slumped more than 30 percent in the last quarter alone as investors fretted over its Europe business -- which according to Credit Suisse, comprises about 45 percent of its assets.
In a report published Thursday, Credit Suisse analysts said the sell-off was overdone as there was a limited risk that Hutchison's Europe operations, except for its port business, could be dragged down by the bloc's economic problems.
Market watchers said longer term investors also switched from defensive names to higher beta ones. Citic Pacific and Ping An Insurance rose 9.4 and 8.1 percent respectively in good volume.
MORE VOLATILITY SEEN NEXT WEEK
Friday's gains helped reverse a steep decline in the past week that started last Friday on renewed fears of a hard landing in China after a series of warnings from brokerages.
Short selling interest has skyrocketed in the last two weeks, but Alan Lam, Julius Baer's Greater China Equity Analyst, said the rising costs of shorting the Hong Kong market, because of fewer long positions to borrow from, could also make it more prohibitive.
While a downside gap that opened up between the low on Sept 30 and the high on Oct 3 was easily scaled on Friday, it is merely one of several that opened after steep losses last month.
Near-term resistance on the charts is next seen at another downside gap, between the low of Sept 21 at about 18,698 and the high of Sept 22 at about 18,296.
The Hang Seng Index had hit its lowest since May 2009 on Tuesday, bouncing off the 61.8 percent Fibonacci retracement of its rise from lows in Oct 2008 to its cyclical peak in Nov 2010, seen at around 16,148.