Hong Kong H-Shares Decline From 8-Month High on China PMI

Hong Kong stocks fell, with an index of Chinese companies sliding from an eight-month high, after a private gauge of mainland factory activity declined for the first time in four months and minutes from the Federal Reserve signaled it may cut stimulus sooner than expected.

Prince Frog International Holdings Ltd. (1259), a maker of baby-care products suspended after its accounting came under scrutiny by a short-seller, tumbled 22 percent as it resumed trading. Zijin Mining Group Co., China’s largest producer of the precious metal, dropped 2.2 percent amid concern tapering of bond purchases will erode demand for haven assets. Air China Ltd. led carriers higher amid optimism a stronger yuan and reforms opening up airspace will benefit the sector.

The Hang Seng China Enterprises Index (HSCEI), also known as the H-share index, lost 0.9 percent to 11,333.14 at the close in Hong Kong after yesterday erasing this year’s losses. The Hang Seng Index (HSI) slid 0.5 percent to 23,580.29, with about twice as many stocks falling for as rising on the 50-member gauge.

“The market has gained too much recently and China’s PMI gave a good excuse to take profit as people want to lock in gains toward the end of the year,” said Louis Tse, a Hong Kong-based director at VC Brokerage Ltd. “Last night’s message is clear that the Fed is most likely going to taper in the next couple rounds of meetings.”

China PMI

A preliminary Purchasing Managers’ Index of China’s factory activity in November from HSBC Holdings Plc and Markit Economics fell to 50.4 from 50.9 the previous month. Analysts surveyed by Bloomberg had expected a reading of 50.8, with 50 the dividing line between growth and contraction.

The H-share index climbed 28 percent from this year’s low on June 25 as data signaled China’s economy is strengthening and policy makers unveiled the biggest package of reforms since the 1990s. The Hang Seng Index is up 19 percent from its June low, and traded at 11.3 times estimated earnings, compared with 16.1 for the Standard & Poor’s 500 Index yesterday.

Prince Frog slumped 22 percent to HK$3.63. The shares started trading for the first time since allegations from Glaucus Research Group caused the shares to plummet last month. Prince Frog’s reported sales figures didn’t match independent data available from Nielsen, the short-seller said in its Oct. 16 report. Prince Frog said the report was without merit.

“It took Prince Frog over one month to respond to the most basic questions about its business,” Glaucus said on its Twitter feed today.

Stimulus Outlook

Futures on the S&P 500 slid 0.1 percent. The gauge yesterday dropped 0.4 percent after minutes from the central bank signaled stimulus may be reduced sooner than expected. The labor market is expected to show improvement and “thus warrant trimming the pace of purchases in coming months,” according to records of the Oct. 29-30 gathering. Fed St. Louis President James Bullard said tapering is “on the table” for the next meeting in December.

Zijin Mining fell 2.2 percent to HK$1.80 and Zhaojin Mining Industry Co. (1818), China’s second-largest gold producer listed in the city, dropped 1.7 percent to HK$5.32. The shares dropped after prices for the precious metal declined to a four-month low.

As of Nov. 20, four of five investors expected the Fed to delay a decision to begin trimming $85 billion in monthly stimulus until March 2014 or later, with just 5 percent looking for a move next month, according to the latest Bloomberg Global Poll.

New China Life Insurance Co. (1336), the nation’s third-largest life insurer by premium income last year, fell 1.1 percent to HK$26.80 after Zurich Insurance Group AG sold its stake in the company for $943 million.

Property Companies

A measure of developers led declines on the Hang Seng Index. China Overseas Land & Investment Ltd., the biggest mainland developer listed in Hong Kong by market value, dropped 2.7 percent to HK$23.85. Shimao Property Holdings Ltd., controlled by billionaire Hui Wing Mau, slumped 3 percent to HK$18.86.

China will increase taxes for owning properties, and will quicken the legislation and reform of a property tax, Finance Minister Lou Jiwei said without elaborating in an interview with the official People’s Daily published today.

Among stocks that rose, Air China surged 9.7 percent to HK$6.09. Cathay Pacific Airways Ltd., the city’s biggest carrier, gained 3.2 percent to HK$16.08 to lead gains on the Hang Seng Index. China Southern Airlines Co., the country’s biggest domestic carrier, and China Eastern Airlines Corp. (670) each jumped at least 9.2 percent. Airlines may benefit from a stronger yuan as many of them have debt in U.S. currency from aircraft purchases, said Linus Yip, a strategist at First Shanghai Securities in Hong Kong.

Airlines Advance

The nation’s opening up of airspace may also benefit the shares as it brings market focus to the industry, Yip said. The Shanghai Securities News reported yesterday China may issue airspace management rules as early as the end of this year. Airline shares climbed yesterday after China’s central bank elaborated on plans to free up foreign-exchange controls.

Futures on the Hang Seng Index slumped 0.7 percent to 23,590. The Hang Seng Volatility Index rose 0.5 percent to 17.10, indicating traders expect the benchmark equity index to swing 4.9 percent in the next 30 days.

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

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net

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