* Hang Seng Index up 0.4 percent in weak turnover
* HSBC shares drop on unexpected contraction in UK economy
* SJM slumps on family feud, traders see buying opportunity
* Short-selling in China ETF shows caution, investors hedging (Updates to midday)
By Vikram S.Subhedar
HONG KONG/SHANGHAI, Jan 26 (Reuters) - Hong Kong shares staged a mild recovery on Wednesday, rising for the first time in five days, although HSBC weighed and flagging turnover suggested a lack of conviction among market players.
The benchmark Hang Seng Index was up 0.44 percent at 23,893.95 by the midday trading break.
While the index has stayed above a medium-term upward trend line in place since the May 2010 low, a strong start to the year stalled as mainland markets continued to underperform, in part because of a shortage of funds in China's financial system.
The Shanghai Composite Index, down 4.2 percent this year and still North Asia's worst performer, edged up 0.5 percent but some market players remained wary.
"This is just a technical bounce and may not continue," said Cao Xuefeng, head of research at Huaxi Securities in Chengdu. "No money, no market."
While short-selling activity in Hong Kong-listed mainland companies, or H shares, has broadly slowed from levels late last year, foreign investors remain cautious on prospects for the Chinese market.
The most shorted China-related exchange traded fund is the iShares FTSE A50 which shows short interest is at a six-month high of 6.5 percent, according to Data Explorers.
The data provider, which tracks short-selling activity across global markets, said that while the high short-interest for the ETF must be partly hedging, it also reflected recent nervousness about prospects for China's domestically listed shares.
A squeeze in China's money markets heading into the Lunar New Year, when cash demand is at its highest, has hit bank funding and hurt the local bond and stock markets.
However, some speculators sought opportunities to pick beaten down shares with the index of small-cap shares rising 1.3 percent, outperforming the broader market's rise.
Water companies were the biggest gainers on the Shanghai market after a report said investment in water conservation projects would hit 2 trillion yuan ($303.8 billion) over the next five years.
China Gezhouba Group Co Ltd, builder of the mammoth Three Gorges Dam, bounced 4.8 percent after sliding on Tuesday, while Chongqing Three Gorges Water Conservancy and Electric Power jumped by its 10 percent daily limit.
HK EDGY, HSBC WEIGHS
Hong Kong's market had a volatile session with the index opening flat, slipping in early trading then rebounding to end the morning slightly higher as resources and commercial property counters offset a retreat by HSBC Holdings Plc.
HSBC fell 1.2 percent after the British economy showed an unexpected contraction in the final quarter of 2010, prompting growth worries in one the bank's largest markets.
Also lower was Macau casino operator SJM Holdings Ltd, hit by a family feud that threatens to escalate into an extended legal wrangle for control.
SJM was down 5.2 percent after slumping as much as 8.5 percent earlier in the session.
Still, some analysts and traders said the near-term weakness could be a good opportunity to buy the stock.
"There is no reason to think that the current kerfuffle will impact SJM's existing businesses over the near term. The brands in Macau remain very strong," said RBS analyst Philip Tulk.
Another Hong Kong-based trader at a Japanese bank said the shares already traded at a discount to peers based on forward valuations and any widening of that discount because of weakness would represent a good opportunity to buy for the long term.
SJM trades at a 37 percent discount to its peers based on forward 12-month price-to-earnings multiple using Thomson Reuters Starmine's SmartEstimate, which gives a higher weighting to historically accurate and more recent estimates. ($1=6.582 Yuan)