China H-Shares Decline as Liquidity Tightens, Yuan Stress Builds

  • Cash supply seen dropping as China moves to lower risks
  • Fed rate hike would be negative for Chinese stocks: strategist

Chinese stocks traded in Hong Kong posted the year’s first back-to-back weekly decline amid tightening liquidity and renewed yuan depreciation pressures.

The Hang Seng China Enterprises Index retreated 0.3 percent, extending a five-day drop to 0.7 percent. Energy companies were among the biggest decliners for the day, with PetroChina Co. dropping to a three-month low as oil prices slumped overnight. Wharf Holdings Ltd. led a gauge of property companies higher after reporting a surge in full-year profit.

The H-share gauge has lost its momentum after reaching a 15-month high on Feb. 22, with some of the companies that had led the rally dropping particularly hard. The nation’s broadest measure of new credit moderated in February as shadow banking activities slumped, suggesting efforts to rein in growth in off-balance-sheet lending may be hitting home. The three-month interbank cost of borrowing yuan in Hong Kong rose the most in two months on Friday amid concerns of reduced supply.

“The market doesn’t really expect there to be too much liquidity this year because China is going to reduce risk in the financial market," Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd., said in a phone interview. "The short-term impact is negative."

Some money managers are turning wary on Chinese shares on concern the economic rebound will gather enough momentum for the central bank to tighten monetary policy further. While the People’s Bank of China has emphasized its neutral course in 2017 and steered clear of boosting benchmark interest rates so far, mainland markets have started to price in a “major hawkish shift” from the PBOC, according to Goldman Sachs Group Inc.

The yuan’s fortunes are adding to the pressure, with the onshore currency set for a third weekly decline as the odds of a Federal Reserve interest-rate increase next week rise to 100 percent. PBOC Governor Zhou Xiaochuan said Friday that the yuan should be relatively stable this year.

"We don’t have major changes to our related policies but we will be more precise when implementing and regulating the market," Zhou said at a rare press conference. "Therefore, under such circumstances, the yuan’s exchange rate will be relatively stable."

The Hang Seng China Enterprises Index fell Thursday by the most so far this year as oil companies and financial firms slid and analysts pointed to a market correction that may still gather steam. The gauge breached its 30-day moving average for the first time since December. Buying interest from mainland investors has waned as well, with the daily net buying of Hong Kong-listed shares through the Shanghai exchange link falling to less than half of the mean of the first two months.

A Fed rate hike would spur capital outflows from Hong Kong and affect investor interest in Chinese stocks, said Sam Chi Yung, a senior strategist at South China Financial Holdings Ltd. in Hong Kong.

Hong Kong’s benchmark Hang Seng Index advanced 0.3 percent for the day while the Shanghai Composite Index retreated 0.1 percent.

  • Great Wall Motor Co. was the day’s biggest gainer on the Hang Seng China Enterprises Index, closing up 3% after the China Association of Automobile Manufacturers said the nation’s vehicle sales jumped 22.4% in February from a year earlier. Geely Automobile Holdings Ltd. climbed 6.2% and Guangzhou Automobile Group Co. rose 3.3% in Hong Kong
  • China Petroleum & Chemical Corp. dropped 1.5% for the day, while PetroChina lost 1.4%
  • I-Cable Communications Ltd. plunged 34% in Hong Kong trading after its parent Wharf decided to scrap plans to sell the unprofitable pay-TV operator and stop pumping new funds into the unit
  • Wharf surged 8.7%, the biggest gain since 2011. The property developer said full-year earnings rose 25% from a year earlier as rents withstood a challenging retail environment and demand for housing stayed strong. Sun Hung Kai Properties Ltd. added 0.8% and Cheung Kong Property Holdings Ltd. rose 0.4%
  • Sunny Optical Technology Group Co. surged 10% to a record high after analysts lauded its strong February shipments. The company’s price target was raised at Credit Suisse Group AG, Bocom International Holdings Co. and BOC International Holdings Ltd.
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