Chinese Stocks in Hong Kong Fall to Global Financial Crisis Lows

China's Economy: Is More Weakness Ahead?
  • Hong Kong dollar trades near the weakest level since 2007
  • Energy producers plunge on oil prices, Cnooc output reduction

Chinese stocks in Hong Kong tumbled to the lowest level since the depths of the global financial crisis as a slide in the city’s dollar spurred concerns over capital outflows. Oil producers and property developers led declines.

The Hang Seng China Enterprises Index plunged as much as 5.5 percent before paring losses to close 4.3 percent lower in Hong Kong. PetroChina Co. fell to an almost 11-year low as oil extended its decline and Cnooc Ltd., China’s largest offshore oil company, said it will cut output for the first time in more than a decade. Hong Kong’s dollar traded near its weakest level since 2007 as concern about China’s slowing economy curbs demand for the city’s assets. The Shanghai Composite Index lost 1 percent.

“The local dollar’s slide is igniting concerns that capital outflows are accelerating as funds are selling equities en masse,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “Overall sentiment is very bad in Hong Kong.”

The so-called H-shares gauge slid to 8,015.44, the lowest since March 2009. The index has slumped 17 percent this year, joining the Shanghai Composite as the world’s worst-performing global benchmark measure out of the 93 tracked by Bloomberg. Similar to their mainland counterparts, Hong Kong policy makers are fighting to prevent a vicious cycle of capital outflows and a weakening currency with the resulting financial-market volatility heightening concern that China’s deepest economic slowdown since 1990 will worsen.

The price difference of Hong Kong-listed shares and their mainland-traded peers widened the most in three months on Wednesday, according to a gauge tracking the price gap of the two markets.

PetroChina and China Petroleum & Chemical Corp. tumbled at least 6 percent in Hong Kong. Oil extended its decline from the lowest close in more than 12 years, while Cnooc’s output cut increased speculation the nation’s producers are succumbing to the global price war. Cnooc’s acknowledgment that spending cuts are hurting production may be a prelude to further reductions by Chinese explorers, according to Nomura Holdings Inc. The stock dropped 6.1 percent.

Hong Kong’s Hang Seng Index tumbled 3.8 percent to a three-year low as trading volumes surged 60 percent above the 30-day average. Property developers led declines, with Cheung Kong Property Holdings Ltd. sliding 7.1 percent to a record low.

Contrarian View

“To protect the Hong Kong dollar peg the government has to raise the interest rate," said Louis Tse, a Hong Kong-based director at VC Brokerage Ltd. “The property companies are high-beta stocks because you have to borrow during the development phase," with higher borrowing costs potentially weighing on home owners as well, he said.

The Hong Kong dollar dropped as low as HK$7.8229, within 0.35 percent of the weak end of its band, while forward contracts sank to their weakest level this century. The currency, which is allowed to trade in a range versus the greenback, last week posted its steepest two-day drop since 1992 as investors pulled money out of the city amid concern about China’s economy. Data on Tuesday showed the nation’s growth missed analysts’ estimates last quarter, while industrial production, retail sales and fixed-asset investment all slowed at the end of the year.

Baring Asset Management Ltd. is eyeing Hong Kong stocks at the lowest valuations in more than a decade, betting that the city’s slumping currency make this an unexpectedly good time to buy equities. That’s in contrast to Core Pacific Yamaichi International Hong Kong Ltd., which sees little chance of outflows abating, and Linus Yip at First Shanghai Securities Ltd., who expects the weak economic environment to drag stocks lower.

Tighter Liquidity

In mainland trading, the CSI 300 Index dropped 1.5 percent, dragged down by consumer and technology companies. Stocks fell as borrowing costs in the money market climbed to a nine-month high and China’s securities regulator allowed seven companies to sell initial public offering shares after the country introduced a new system of bidding for IPO stocks. The seven will arrange the offerings before the week-long Chinese New Year holidays that start Feb. 8.

The overnight repurchase rate, a gauge of funding availability in the financial system, rose six basis points to 2.06 percent in Shanghai. The monetary authority provided 410 billion yuan ($62 billion) to commercial lenders via its Medium-term Lending Facility on Tuesday. It plans to inject more than 600 billion yuan into the financial system to meet demand before the Chinese holidays.

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