Wednesday, February 9, 2011

Hong Kong shares drop to 2011 low on rate rise; Shanghai slips

HONG KONG: Hong Kong shares slid on Wednesday, Feb. 9, with the benchmark index falling below its 100-day moving average after China's second interest rate rise in just over six weeks prompted a selloff in developers and energy counters.

The Hang Seng Index fell 1.4 percent to its lowest close this year while Shanghai's main stock index closed 0.9 percent lower after mainland markets reopened after a week-long break for Lunar New Year.

China's central bank raised interest rates on the last day of the holiday and set the yuan mid-point for the day's trading in the currency against the U.S. dollar at a record high as it battles stubbornly high inflation.

"We expect further interest rate tightening from China for as long as they need to curb inflation, cool off asset markets, while at the same time maintaining a slow appreciation of the RMB," said Wilfred Sit, Head of Asia Pacific Investment Strategy at Mirae Asset Global Investments in Hong Kong.

"The recent moves by China will give more room for other Asian countries to raise rates and regional equity markets will react negatively to this."

Property, commodity-related and financial firms led the selloff in Shanghai on worries that higher borrowing costs could curb consumer demand for homes and new loans. The property sub-index fell 2.1 percent.

That weighed on developers in Hong Kong which have lagged the broader market this year after a strong second-half rally in 2010.

Hong Kong's property sub-index fell 2.4 percent and is down 2.7 percent this year compared with the Hang Seng's mild 0.6 percent gain.

Chinese developers in Hong Kong were hit the hardest with New World Development down 4.2 percent, while Sino Land Co slumped 4 percent. Local bellwether Sun Hung Kai PROPERTIES [] Ltd fell 2.4 percent.



In a rare divergence from broader market trends, HSBC shares, which have a near 15 percent weighting on the benchmark, gained 1 percent, bringing their gains for the year to over 12 percent.

Expectations of strong results, due on February 28, and recovery from last year's underperformance against rivals as well as broader markets, are keeping buyers interested.

"For Asian investors concerned about outflows from emerging markets and into the United States, this offers sideways access," said a trader at a large European bank.

HSBC shares fell 10.1 percent last year compared with a 13 percent gain in emerging market-focused Standard Chartered and a 5.3 percent advance for the Hang Seng.

According to Thomson Reuters Starmin, HSBC shares also trade about 17 percent below their 10-year median forward 12-month price-to-earnings ratio.

But with the 20-day correlation between HSBC and the Hang Seng at its lowest since March 2010, according to Thomson Reuters data, some investors were betting on a pullback in the bank's shares.

Short-selling in the counter picked up with the percentage of turnover sold short rising to 10 percent compared with an average of 6 percent seen over the past 5 sessions, according to exchange data. - Reuters

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