Hong Kong Stocks Erase QE3 Gains Amid China Credit Crunch

Hong Kong stocks fell, erasing all gains since the Federal Reserve pledged a third round of quantitative easing. Shares retreated amid concern a credit crunch is worsening for Chinese banks and after the U.S. central bank said it may start curbing stimulus this year.

The Hang Seng Index declined 2.9 percent to 20,382.87 in Hong Kong, its lowest close since Sept. 13. All but one of the 50 companies on the gauge fell, with volume 39 percent above the 30-day average. The Hang Seng China Enterprises Index of mainland stocks listed in the city fell 3.3 percent to 9,265.30.

Financials and developers led declines among the Hang Seng Index’s industry groups. Industrial & Commercial Bank of China Ltd., the world’s largest lender, sank 3.8 percent after a measure of interbank funding availability posted its biggest one-day gain in seven years. China Resources Land Ltd., the second-biggest mainland developer traded in Hong Kong, dropped 6.9 percent. Techtronic Industries Co., a maker of power tools that gets most its sales in North America, slid 4.9 percent.

“There is a credit crunch in the near term,” Ben Kwong, chief operating officer at Hong Kong-based KGI Asia Ltd., said in a phone interview. “The intention of the People’s Bank of China is to put some pressure on banks to clean up their problems. The expectation of a China slowdown is already building up.”

Shares also fell on signs a slowdown in China manufacturing is deepening. A preliminary reading of 48.3 for a Purchasing Manager’s Index released today by HSBC Holdings Plc and Market Economics compares with a 49.1 median estimate in a Bloomberg News Survey. The final May reading for the gauge was 49.2, with a number below 50 indicating contraction.

Banks Drop

A gauge of property developers on the Hang Seng lost 3.6 percent, while a measure of financial companies slid 3 percent. China Resources Land declined 6.9 percent to HK$19.32. Agricultural Bank of China Ltd. fell 2.9 percent to HK$3.09. ICBC retreated 3.8 percent to HK$4.57, the lowest since October. The stock has not risen a single day this month.

The slump in factory activity is happening amid a worsening cash crunch. The nation’s one-year interest-rate swap, which is used to exchange fixed payments for the floating seven-day repurchase rate, surged as much as 14 basis points to 4.62 percent, the highest since Bloomberg started tracking the data in May 2006. A crackdown on illegal capital inflows, efforts to rein in shadow banking and a campaign to control home prices have contributed to increased borrowing costs.

Strategic Support

China’s Cabinet said the nation’s financial system must better support growth and restructuring. Authorities will boost credit support for industries the government has defined as strategic and labor intensive, the State Council said in Beijing yesterday after a meeting led by Premier Li Keqiang.

The Hang Seng China Enterprises Index, also known as the H-share index, has fallen 24 percent from its Feb. 1 high, with a 20 percent decline considered the threshold for a bear market. The measure is trading at 6.83 times estimated earnings, 28 percent below its three-year average. That compares with 14.76 times projected profit for the Standard & Poor’s 500 Index, according to Bloomberg data.

Futures on the S&P 500 fell 0.7 percent after the underlying gauge yesterday retreated 1.4 percent in New York, the biggest decline this month. Shares dropped after Fed Chairman Ben S. Bernanke said the central bank may reduce bond purchases this year if the job market shows sustained improvement.

The HSI Volatility Index climbed 7.7 percent to 22.72, the highest level in a year, indicating options traders expect swings of 6.5 percent on the Hang Seng Index in the next 30 days. Hang Seng futures contracts expiring this month dropped 2.8 percent to 20,356.

The benchmark Hang Seng index dropped 10 percent this year, making Hong Kong the worst performer among developed equity markets, according to data compiled by Bloomberg.

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