Chinese Shares Drop in Hong Kong as Energy Companies Slip on Oil

  • Market overbought, faces earnings risks, strategist says
  • Hang Seng Index erases day’s losses in closing auction

Looking to Hang Seng as an S&P 500 Alternative

Chinese stocks declined in Hong Kong, dragged down by energy producers after oil prices tumbled on global oversupply concerns.

The Hang Seng China Enterprises Index fell 0.2 percent, with China Oilfield Services Ltd. and PetroChina Co. leading the retreat for energy-related companies. Anhui Conch Cement Co. surged the most in a month after its first-half net profit beat estimates. The Hang Seng Index, which traded in the red for most of the day, erased losses in the closing auction.

Hong Kong’s equity benchmark advanced more than 5 percent this month through Monday, sending its relative strength index to 70, which signals to some traders that a correction is nearby. The volume of the city’s largest exchange-traded fund, the Tracker Fund of Hong Kong, which follows the Hang Seng gauge, reached a record HK$317 million ($41 million) on Monday.

“The market is overbought,” said Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong. “The Shenzhen stock link has been priced in and we’re running out of positive catalysts. The market faces a lot of downside risks if corporate earnings trail estimates and if Janet Yellen gives any hawkish signals.”

Global Effect

Global markets have been dominated in the past week by speculation about the timing of the Federal Reserve’s next interest-rate increase. Comments from regional Fed presidents suggested U.S. borrowing costs may rise as early as next month, and a Friday speech by Fed Chair Yellen will be closely watched. Futures prices indicate a 51 percent chance the central bank will increase rates this year. Chinese regulators last week announced the details of a long-delayed Hong Kong-Shenzhen equity link.

Tencent Holdings Ltd., which has the highest weighting on the Hang Seng measure, fell 0.6 percent. The stock is close to overtaking China Mobile Ltd. as the country’s biggest firm by market capitalization. The Internet giant is valued at HK$1.93 trillion, compared with China Mobile’s HK$2 trillion.

The Hang Seng China gauge closed at 9,586.99, while the Hang Seng Index rose 1 point after dropping as much as 0.6 percent. On the mainland, the Shanghai Composite Index climbed 0.2 percent and the ChiNext gauge of small-cap companies rose 0.3 percent after slipping to a one-week low on Tuesday.

Hong Kong Exchanges & Clearing Ltd. reintroduced the closing auction last month in an effort to reduce volatility and deter manipulation. HKEx abandoned its previous auction in 2009 after HSBC Holdings Plc shares plunged about 10 percent at the end of the day. The new 10-minute session, which features a random close in the final two minutes, is similar to those used by the London Stock Exchange and ASX Ltd. in Australia.

SOE Reform

On the mainland, policy makers took further steps to overhaul state-owned enterprises. The State Council has approved a restructuring of China National Building Materials Group Corp. and China National Materials Group Corp., the State-owned Assets Supervision and Administration Commission said in a statement on its website Monday. In the currency market, the yuan climbed for a second day amid speculation policy makers will steady the exchange rate before a Group of 20 meeting in September.

“The government will push ahead with SOE reforms in the second half, providing strong policy support,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “The market is absorbing the impact of the U.S. rate outlook as the PBOC carefully manages expectations and stabilizes the yuan.”

Yuan, Bonds

The yuan’s 2.2 percent decline this year and signs of a slowing economy have driven down bond yields in China, prompting yield-hunting investors to seek out the most defensive part of the stock market. The Shanghai Stock Exchange Dividend Index -- which is composed largely of banks, utilities and expressway operators -- has rallied 5.5 percent in the past month. The 50-member gauge returns 3.6 percent in dividends, compared with 2.68 percent for 10-year sovereign debt and 2 percent for the benchmark equity measure.

CRRC Corp. dropped 4.2 percent in Hong Kong, the most in two months. China’s only maker of high-speed locomotives reported a 2 percent gain in first-half profit, trailing analysts’ estimates.

Oil extended declines after the biggest loss in three weeks before weekly U.S. crude inventory data and as the market awaits comment from the Nigerian government on a proposal by militants to end hostilities.

October futures fell as much as 1 percent in New York after declining the first time in eight days on Monday. Crude stockpiles probably dropped by 1 million barrels last week, according to a Bloomberg survey before a report from the Energy Information Administration on Wednesday.

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