Bloomberg News

Hong Kong Stocks Fall Amid China Inflation, Europe Downgrades

October 14, 2011

Oct. 14 (Bloomberg) -- Hong Kong’s Hang Seng Index fell, ending its longest winning streak since 2009, after China’s continued inflation reduced chances for a relaxation of monetary policy, and after Spain and some banks’ ratings were cut.

China Overseas Land & Investment Ltd., a developer controlled by the nation’s construction ministry, dropped 4.2 percent. Industrial & Commercial Bank of China Ltd., the nation’s biggest lender by market value, slid 4.3 percent. Standard Chartered Plc, the U.K.’s second-biggest lender, slid 2.3 percent as rating cuts for Spain and some European banks weighed on optimism the region’s debt crisis will be contained.

The Hang Seng Index fell 1.4 percent to 18,501.79, paring its weekly advance to 4.5 percent. Almost five stocks declined for each that gained on the 46-member gauge.

The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong slid 2.2 percent to 9,584.83, extending its decline in late trading after central bank data showed the nation’s M2 money supply rose 13 percent last month. That’s the slowest pace since 2002, according to Bloomberg Data.

“The fact that inflation is still high shows it’s unlikely that the central bank will relax money supply so soon,” said Francis Lun, managing director at Lyncean Holdings Ltd. “The market has been overbought in the short term, and it’s mainly profit taking. It has been euphoria, a paradise for investors.”

6-Day Surge

The Hang Seng Index surged 15 percent in the six days through yesterday, amid optimism European leaders were moving closer to a plan for taming the debt crisis. Shares also gained as China signaled support for large banks and small companies.

Companies on the index traded at 10 times forecast earnings, around March 2009 levels. That compares with 12.1 times for the Standard & Poor’s 500 Index.

Developers and banks declined the most among the Hang Seng Index’s four industry groups, after the National Bureau of Statistics said China’s consumer prices increased 6.1 percent from a year earlier in September, matching the median forecast in a Bloomberg News survey. That follows a 6.2 percent gain in August.

China Overseas retreated 4.2 percent to HK$13.60, and China Resources Land Ltd., a state-controlled developer, sank 6.3 percent to HK$10.04. ICBC declined 4.3 percent to HK$4.25, and China Construction Bank Corp., the nation’s No. 2 lender by market value, lost 2.5 percent to HK$5.14.

Tight Reins

China has raised interest rates and reserve-requirement ratios for banks to cool inflation that’s at the highest level in almost three years. The nation’s central bank Governor Zhou Xiaochuan said last month inflation remained China’s “top concern.”

Europe-related shares declined after Spain had its credit rating cut one level to AA- by Standard & Poor’s, citing heightened risks to the country’s growth prospects.

Standard Chartered retreated 2.3 percent to HK$172.50, and HSBC Holdings Plc, Europe’s largest bank by market value, sank 1.5 percent to HK$63.70. Esprit Holdings Ltd., a clothier that counts Europe as its biggest market, slid 1.5 percent to HK$11.60.

“The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further,” S&P said in a statement.

Hopes for Solution

“Investors are hoping Europe will find a solution to the sovereign-debt crisis, but if that doesn’t happen the market could come back down again,” said Lee King Fuei, a Singapore- based fund manager at Schroders Plc, which oversaw $323 billion as of June 30. “Politically, it’s going to be difficult to find a solution. Governments in the U.S. and Europe are left with limited stimulus options.”

Rating downgrades for European banks also added to concern about the outlook for the region. UBS AG, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc had long-term issuer default grades cut by Fitch Ratings, which put more than a dozen other lenders on watch negative as part of a global review.

Futures on the Hang Seng Index slid 1 percent to 18,432. The HSI Volatility Index rose 0.1 percent to 33.23, indicating options traders expect a swing of 10 percent in the Hang Seng Index in the next 30 days.

--Wish assistance from Jonathan Burgos in Singapore. Editor: Jim McDonald

To contact the reporter on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.


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