The rally was led by Chinese internet stocks, with Alibaba closing 6.7% higher in Hong Kong © Peter Parks/AFP/Getty Images

Hong Kong equities notched their best daily gains in three months as short sellers closed out bets against Chinese internet groups and some investors snapped up shares on hopes that a protracted sell-off for China stocks was overdone.

The sudden upswing for the Hang Seng index took it 4 per cent higher on Friday. That marked the best day for the Hong Kong stock gauge since early March and followed weeks of selling that nearly pushed the benchmark 20 per cent lower from its January peak and into a bear market.

The rally on Friday was led by Chinese internet stocks, with the Hang Seng Tech index jumping 5.3 per cent. Tencent and Alibaba closed 6 and 6.7 per cent higher in Hong Kong, respectively.

Those gains followed an overnight rally for Chinese tech stocks on Wall Street, where Tencent’s shares rose 4.5 per cent and the Nasdaq Golden Dragons index tracking large Chinese companies finished the session up 4 per cent.

A trader at one Wall Street bank noted gains for Tencent during US trading on Thursday had begun ramping up shortly after the release of a research note from Citigroup. The note flagged that Tencent’s American depositary receipts had fallen to nearly the same lows at which most investors had bought in during a reopening rally for Chinese stocks late last year.

“We would expect [investors who bought Tencent shares in December] to slow down the pace of declines in the stock and provide some support at these levels,” Mohammed Apabhai, global markets head of Asia trading strategy at Citi, wrote in the note.

Such a surge in support for Chinese internet stocks could prompt short sellers targeting Tencent and similar companies to close out their positions, a practice known as “short covering”, and in Hong Kong on Friday, traders said short covering appeared to be driving much of the rally.

“I have stacks of buy orders, but it’s all short covering,” said the trading desk head of one Chinese broker in Hong Kong. “There’s no long-only buying going on and the big global guys are not involved . . . there’s nothing fundamental to this rally.”

Dickie Wong, head of research at Hong Kong-based Kingston Securities, said there was “no question that some of this is short covering”.

Wong said that other drivers of the rally included Thursday’s reading on Chinese factory activity, which had come in ahead of economists’ estimates, as well as growing expectations in global markets that the US Federal Reserve might not raise rates at its June meeting.

However, he was pessimistic on the chances that Friday’s gains would carry on for more than a few sessions — if that.

“Generally speaking when we talk about the economy in mainland China, most of the recent data points have been worse than expected,” Wong said. “I don’t see so much upside.”

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