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SCMP Reporter

Mainland plays bear the brunt in biggest fall in four weeks

Hong Kong stocks took their biggest tumble in four weeks yesterday as a range of factors, including  a potential  mainland interest-rate rise,  were taken as reasons to sell.

After a few strong weeks the market was technically ripe for a sell-off, and once  early morning gains  started to reverse, the downward momentum quickly gained  pace, analysts said.

Continuing  violence in the Middle East  also kept investors jittery as they pondered a potential negative reaction on Wall Street.

The Hang Seng Index dropped 2.58 per cent to 12,076.57 points in  the biggest one-day decline since May 17, when it fell 2.74 per cent  to 10,967.65 points - its lowest point this year.

The index fell through both its 200-day and 10-day moving averages yesterday, triggering yet more selling, before closing just below the 50-day trend line.

Early in the day, the property sector had  led the market higher in response to strong weekend sales  at a Sun Hung Kai Properties development in Ma Wan. But property stocks were hit hard as investors began to realise that a positive surprise from today's  land auction  appeared   unlikely.

Mainland-related stocks fared the worst, with the H-share index falling 3.18 per cent and the red-chip index shedding 3.89 per cent.

Comments by  a research department official at the People's Bank of China  at the weekend suggesting a rate rise of 25 to 50 basis points may be imminent were partly blamed for the sell-off, even though a central bank spokesman later denied the report.

Denial or not, investors seem increasingly convinced that a tightening is drawing near, especially after consumer prices rose 4.4 per cent  last month.

'Previously, the prevailing argument among Chinese officials was that China only needed administrative measures [to cool the economy],' said Trevor Cheung, the head of research at DBS Vickers Securities. 'But now there seems to be a new school of thought that it will also go for a rate increase.'

With the US almost certain to lift its key federal funds rate at the end of this month, Beijing was likely to take the opportunity to follow suit, as a 'co-ordinated' move with the US would minimise undesired effects such as further upward pressure on the yuan, he said.

Investors worry that a rate rise may dampen economic growth in the mainland, with a negative impact  on corporate earnings. Other  concerns  include an escalating crisis related to mainland investment firm D'Long International Strategic Investment,   as the  list of companies and banks announcing  exposure to the troubled firm continues to grow.

'People are worried that if it is a case of misuse of funds it could all start snowballing,' said Andrew Clarke, a salesman with Kim Eng Securities.



Stocks tumble 2.5pc amid China rates fears