(Fixes day in first paragraph)
* Hang Seng struggles to hold onto gains; up 0.2 pct
* Shanghai Comp up 1.2 percent but turnover at 4-mth low
* 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
(Updates to close)
By Vikram S.Subhedar and Chen Yixin
HONG KONG/SHANGHAI, Jan 26 (Reuters) - Hong Kong shares rose for the first time in five days on Wednesday, though losses in banking heayweight HSBC and flagging turnover suggested investor confidence remained frail.
The Hang Seng ended up 0.2 percent, with HSBC the biggest drag on the benchmark index after an unexpected contraction in the UK economy hit shares of Europe's largest lender. HSBC's Hong Kong-listed shares fell 1 percent.
The Shanghai Composite Index <.SSEC rose 1.2 percent, but turnover shrunk to its lowest in four months as investors continued to worry that Beijing will unleash more policy tightening measures this year to cool inflation.
The Shanghai index has lost 4.2 percent this year, making it North Asia's worst performing equity market.
"It's quite normal for it to rebound following losses over the past few sessions. But if volume remains thin, the index has little potential to rise," said Chen Shaodan, a senior analyst at China Development Bank Securities in Beijing.
Trading activity remained light ahead of the Lunar New Year holidays in early February, while foreign investors remain wary about Chinese shares after the Shanghai index lost more than 14 percent last year.
While short-selling of Hong Kong-listed mainland China companies, or H shares, has broadly slowed from levels late last year, exchange traded funds (ETF) have seen activity pick up.
The most shorted, China-related ETF 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 up 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 6.2 percent after sliding on Tuesday, while Chongqing Three Gorges Water Conservancy and Electric Power jumped by its 10 percent daily limit.
HONG KONG EDGY, HSBC WEIGHS
In Hong Kong, the Hang Seng dipped in and out of positive territory in choppy trade.
While the index has managed to stay above a medium-term upward trend line in place since its May 2010 low, a strong start to the year has stalled as mainland markets continue to underperform.
Besides HSBC, Macau casino operator SJM Holdings Ltd was also in focus, sliding nearly 5 percent as a family feud over control fo the company threatened to escalate into an extended legal wrangle for control.
Some analysts and traders said the near-term weakness could be a good opportunity to buy the stock given the company's strong revenue from its casino operations.
"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 the 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. (Editing by Kim Coghill) ($1=6.582 Yuan)
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