Chinese Stocks Slump in Hong Kong as Yuan Plunges for Second Day

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Chinese stocks slumped in Hong Kong, extending the world’s worst rout, after a second-day plunge by the nation’s currency increased concern that the nation’s economic slowdown is deepening.

The Hang Seng China Enterprises Index slid 2 percent to 11,042.79 at the close, extending its loss this quarter to 15 percent. The yuan dropped 1.9 percent in domestic trading, after the central bank set its reference rate 1.6 percent lower at 6.3306 per dollar. Data showed industrial production expanded less than analysts estimated. China Southern Airlines Co. posted the steepest two-day loss in six years as the cheaper currency boosts the cost of servicing dollar-based debt.

Surging volatility in the currency comes on the heels of a $4 trillion rout in mainland equity markets that sparked record selling by foreign investors. This week’s unexpected yuan devaluation will make the nation’s shares even less appealing to global money managers, according to Partners Capital International.

“The attraction of holding renminbi-based assets including shares, bonds and everything else decreases when the currency depreciates,” said Ronald Wan, chief executive at Partners Capital in Hong Kong.

A measure of credit risk for China climbed to a two-year high as the weaker, more flexible currency increases the cost of overseas borrowings.

The Shanghai Composite Index lost 1.1 percent. The CSI 300 Index dropped 1.2 percent. The Hang Seng Index in Hong Kong fell 2.4 percent.

Profit Impact

Airlines led declines in Hong Kong. China Southern sank 7 percent, extending yesterday’s 18 percent rout. China Southern says every 1 percent drop in the yuan cuts 767 million yuan ($122 million) from annual profit, according to the carrier’s analysis in its 2014 financial report. Air China Ltd. slumped 5.8 percent to the lowest level since March.

Industrial output rose 6 percent last month from a year earlier, the statistics bureau said Wednesday, missing the median estimate of 6.6 percent in a Bloomberg survey. Retail sales rose 10.5 percent in July, while fixed-asset investment excluding rural households climbed 11.2 percent in the first seven months. Both also trailed forecasts.

Industrial output rose 6 percent last month from a year earlier, the statistics bureau said Wednesday, missing the median estimate of 6.6 percent in a Bloomberg survey and compared with 6.8 percent in June. Retail sales rose 10.5 percent in July, while fixed-asset investment excluding rural households climbed 11.2 percent in the first seven months.

Zoomlion Heavy Industry Science & Technology Co. and Sany Heavy Industry Co., the biggest Chinese makers of construction equipment, slid more than 3 percent in mainland trading.

Competitive Devaluations

The People’s Bank of China said Wednesday there’s no economic basis for the currency to keep devaluing, highlighting the nation’s current-account surplus and $3.65 trillion of foreign-exchange reserves. This week’s devaluation shows policy makers are now placing a greater emphasis on supporting exports, having previously been propping up the yuan to deter capital outflows, protect foreign-currency borrowers and encourage greater global usage.

“The policy of weakening the yuan to boost exports may not be as effective because all other Asian currencies are competing,” Wan said. ’’Also, a weaker yuan means weaker consumption power and Chinese demand for foreign products and commodities will weaken.’’

— With assistance by Kyoungwha Kim

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