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Hong Kong H Shares Drop 20-Month Low on China Cash Crunch

June 24 (Bloomberg) -- Hong Kong stocks slid, with an index of Chinese companies falling to a 20-month low, as gauges of mainland shares plunged amid concern China’s cash crunch will hurt economic growth.

Agricultural Bank of China Ltd., the nation’s No. 3 lender, declined 2.9 percent. Techtronic Industries Co., a maker of power tools that get 73 percent of sales from North America, fell 5.8 percent. Cnooc Ltd., China’s biggest offshore oil company, retreated 3 percent after crude prices dropped last week. Belle International Holdings Ltd., the nation’s largest footwear retailer, slid 7.3 percent after BNP Paribas SA cut its target price.

The Hang Seng China Enterprises Index of mainland companies slid 3.2 percent to 8,938.63, its lowest close since Oct. 10, 2011. The Shanghai Composite Index, which tracks the largest mainland market, tumbled 5.3 percent. The CSI 300 Index of the country’s biggest companies plunged 6.3 percent, its steepest decline since August 2009, capping a 22 percent retreat from a Feb. 6 high and entering a so-called bear market.

“There’s general weakness in equity markets globally, especially in China where there’s tightness in short-term liquidity and investors are worried about the policy stance of the government,” said Yoji Takeda, head of the Asian equity management team at RBC Investment (Asia) Ltd., which oversees $1.5 billion. “There’s weakened attitude among investors.”

The Hang Seng Index slid 2.2 percent to 19,813.98, with all but two stocks falling on the 50-member gauge. Trading volume was 38 percent above the 30-day average.

China Growth

Goldman Sachs Group Inc. cut its forecast for China’s 2013 economic growth to 7.4 percent from 7.8 percent amid concern over elevated money-market rates. China International Capital Corp. reduced its forecast to 7.4 percent from 7.7 percent.

Agricultural Bank dropped 2.9 percent to HK$2.99. Industrial & Commercial Bank of China Ltd., the world’s largest lender, sank 3 percent to HK$4.48.

China Minsheng Banking Corp. tumbled 8 percent to HK$7.22. The nation’s cash squeeze may weigh on smaller banks’ financial strength as their higher reliance on interbank funding could lead to an erosion of loan margins, Moody’s Investors Service said in an e-mailed statement today.

The Hang Seng Index last week capped its longest weekly losing streak since 2008 amid speculation a credit crunch for Chinese banks will hamper earnings and concern the Fed will begin to draw down stimulus. Hong Kong’s benchmark equity gauge, the worst performing among major developed markets this year, traded at 9.6 times estimated earnings on June 21, according to data compiled by Bloomberg. That’s 23 percent below its five-year average of 12.5.

The People’s Bank of China said the nation should “appropriately fine-tune” its policies, according to a statement on its website yesterday that summarized the monetary policy committee’s second-quarter meeting in Beijing. It’s the first time since September that the panel, led by Governor Zhou Xiaochuan, has used the “fine-tune” phrase, suggesting officials are more open to loosening policies.

Money Market

The comments follow an easing of the cash crunch on June 21 after the seven-day repurchase rate, a gauge of interbank funding availability, rose to the highest level since at least 2003. Slowing growth in the world’s second-largest economy, a crackdown on illegal capital inflows and efforts to rein in shadow banking have contributed to increased borrowing costs.

China’s benchmark money-market rates tumbled for a second day, extending a retreat from record highs, on signs targeted injections of funds are being used to ease a shortage of cash. Interbank loans were recorded in the final hour of trading on both June 20 and 21 at below-market rates, according to data compiled by Bloomberg.

“Persistently high short-term rates will further damp China’s already sluggish real economic activities,” said Liu Li-Gang, Australia & New Zealand Banking Group Ltd.’s chief China economist in Hong Kong.

U.S. Futures

Futures on the Standard & Poor’s 500 Index retreated 0.7 percent. The gauge dropped 2.1 percent last week after the Fed indicated it could start paring asset purchases should risks to the U.S. economy abate.

Techtronic dropped 5.8 percent to HK$17.16. Li & Fung Ltd., a supplier of toys and clothes to retailers including Wal-Mart Stores Inc., slumped 2.1 percent to HK$10.42, while Man Wah Holdings Ltd., a sofa maker that gets half its sales from the U.S., fell 4.6 percent to HK$9.25.

Cnooc slid 3 percent to HK$12.34, while PetroChina Co., the nation’s No. 1 energy producer, declined 2.5 percent to HK$7.91 after West Texas Intermediate oil for June delivery dropped 1.5 percent in New York on June 21.

Belle sank 7.3 percent to HK$10.10, the biggest drop on the Hang Seng Index, after BNP cut its 12-month target price to HK$11.80 from HK$13.70. The company’s same-store-sales growth for the second quarter may drop 4 percent due to unfavorable weather conditions, an outbreak of bird flu and competition from internet sales, BNP analysts led by Sarah Liu wrote in a report.

“The market is still under selling pressure,” said Linus Yip, chief strategist at First Shanghai Securities in Hong Kong. “Short-term liquidity is still tight in China.” The market may still need some time to reallocate after the Fed said it could curb stimulus this year, Yip said.

Futures on the Hang Seng Index declined 2 percent to 19,798. The HSI Volatility Index surged 18 percent to 27.33, the highest since June 2012, indicating traders expect a swing of 7.8 percent for the equity benchmark 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: Nick Gentle at ngentle2@bloomberg.net

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