Hong Kong H Shares Fall Most in 2 Weeks on China Profits

Hong Kong stocks fell, with a measure of mainland stocks listed in the city capping its biggest drop in two weeks, as banks slid and after China’s industrial profit growth slowed.

Kunlun Energy Co., a mainland gas supplier controlled by PetroChina Co., slumped 6.2 percent to lead declines on the Hang Seng Index. Jiangxi Copper Co., the nation’s No. 1 producer of the industrial commodity, slid 2.2 percent after metal prices dropped. Industrial & Commercial Bank of China Ltd., the country’s biggest lender, fell 1 percent after the nation said it will start auditing government debt.

The Hang Seng China Enterprises Index fell 1.2 percent to 9,641.07 at the close in Hong Kong, capping its biggest decline since July 12. The benchmark Hang Seng Index slipped 0.5 percent to 21,850.15 after rising for five weeks through July 26. About three stocks declined for each that gained on the 50-member gauge, with volume 37 percent lower than the 30-day average.

“Sentiment is very poor, especially for mainland Chinese investors,” said Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd. “They are waiting to see government policies from China. We don’t expect a better performance for the Hong Kong market in the third quarter.”

Industrial Profit

The Hang Seng Index on July 26 capped its longest weekly win streak since October as Tencent Holdings Ltd. rose to a record after U.S. Internet stocks surged. The gauge fell 3.6 percent this year, the worst performer in developed markets tracked by Bloomberg, as China growth slows and on concern the Federal Reserve will taper stimulus.

Net income at Chinese industrial companies increased 6.3 percent in June from a year earlier, the Beijing-based National Bureau of Statistics said July 27, down from 15.5 percent in May. The world’s second-biggest economy will start a nationwide audit of government debt this week as the new Communist Party leadership investigates threats to growth and the financial system from the record credit boom.

Measures of materials and energy companies led declines on the Hang Seng Composite Index. Kunlun Energy slumped 6.2 percent to HK$11.60, while Anhui Conch Cement Co., China’s biggest maker of the material, retreated 3 percent to HK$23.05. China National Building Material Co., the second-largest, slumped 3.1 percent to HK$7.19.

“Industrial companies’ profit numbers are pretty bad. There are no positive catalysts for the market,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “The audit may stoke concern among investors that local governments may have amassed a huge amount of debt, which will be a big drag on the economy and state infrastructure construction.”

State Audit

The government debt audit will bring new uncertainty to the market, Guotai Junan Securities Co. wrote in a report. It will have limited impact to banks’ fundamentals in the short-term but may hurt share prices, it said.

Four of the five biggest drags on the Hang Seng Index were banks. ICBC dropped 1 percent to HK$5.06. Agricultural Bank of China Ltd., the nation’s No. 3 lender, fell 1.6 percent to HK$3.14.

Materials and energy companies led declines this year on the Hang Seng Composite Index on concern a mainland slowdown will sap demand. Gauges of information technology stocks and utilities were the top gainers among the index’s 11 industry groups.

Relative Value

The Hang Seng Index traded at 10.4 times estimated earnings, compared with 15.3 times for the Standard & Poor’s 500 Index and 13.5 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

The Hang Seng China Enterprises Index, also known as the H-share index, fell as much as 27 percent from a Feb. 1 high, meeting some investors’ definition of a bear market. The measure, which has since rebounded 8.7 percent, traded at 1.16 times the value of net assets, 35 percent lower than it five-year average of 1.78.

Jiangxi Copper fell 2.2 percent to HK$13.62, while Aluminum Corp. of China Ltd., the nation’s No. 1 supplier of the light metal by market value, slid 2.7 percent to HK$2.54. The London Metal Exchange Index of industrial metals slid 1.8 percent on July 26.

Futures on the S&P 500 fell 0.2 percent today. The U.S. equity benchmark rose 0.1 percent on July 26 as investors weighed corporate earnings and consumer confidence before the Fed’s Open Market Committee’s meeting to review policy on July 30-31.

Solar Shares

European Union and Chinese negotiators reached an agreement to curb EU imports of solar panels from China in exchange for exempting the shipments from punitive tariffs.

GCL-Poly Energy Holdings Ltd., the world’s biggest producer of solar-grade polysilicon, climbed 1.5 percent to HK$1.99. Solargiga Energy Holdings Ltd., a maker of silicon wafers, increased 2.5 percent to 41.5 Hong Kong cents.

Hang Seng Index futures slid 0.5 percent to 21,846. The HSI Volatility Index surged 7.9 percent to 18.29, indicating traders expect a swing of 5.2 percent for the equity benchmark in the next 30 days.