Daily Report

Shanghai, Hong Kong stocks retreat amid signs deflationary pressures linger on in China

Shanghai’s Composite Index sheds 2 per cent, while Hang Seng ends fractionally lower

PUBLISHED : Thursday, 10 March, 2016, 9:23am
UPDATED : Thursday, 10 March, 2016, 6:13pm

Chinese stocks fell sharply on Thursday, extending losses from the previous session, as investors fretted that lingering deflation may pose further downside risks to the economy, following the release of February figures for consumer and producer prices.

The Shanghai Composite Index dropped for a second day in a row, shedding 2 per cent, or 57.83 points, to close at 2,804.73. The index has posted a combined loss of 3.3 per cent since Wednesday.

The large-company tracking CSI300 declined 1.9 per cent or 58.76 points to 3,013.15. The Shenzhen Composite Index fell 1.4 per cent or 24.47 points to 1,688.97. The Nasdaq-style ChiNext Index dropped 1.7 per cent or 33.85 points to 1,936.97.

Turnover for Shanghai and Shenzhen markets continued to shrink, with 355 billion yuan (HK$423 billion) worth of shares changing hands, down from Wednesday’s turnover of 427 billion yuan.

In Hong Kong, the Hang Seng Index was dragged lower by mainland markets, closing 0.1 per cent or 11.84 points lower at 19,984.42. The Hang Seng China Enterprises Index lost 0.3 per cent or 21.34 points to 8,420.14.

Turnover for main board Hong Kong markets decreased to HK$54 billion from Wednesday’s HK$57 billion, the lowest level this year.

Earlier in the day, China’s statistics authority reported that the consumer price index (CPI) rose 2.3 per cent in February on year, the fastest rate of inflation since July 2014. Driven by a surge in food prices,

the monthly CPI compares to a 1.6 per cent rise in January on year and exceeded a forecast 1.9 per cent gain among analysts polled by Reuters. Meanwhile, the producer price index (PPI) remained in negative territory, falling 4.9 per cent in February on year, extending the decline for a 48th consecutive month.

“A combination of unusually cold weather and a surge in demand during Chinese New Year pushed up food prices last month,” said Julian Evans-Pritchard, China economist for Capital Economics, adding that the jump in food inflation was “seasonal” and “will prove short-lived”.

Angus Nicholson, an analyst for IG Group, said the lack of genuine price pressures in the economy was made “painfully clear” by the fact that both the core CPI and non-food CPI measures weakened in February.

“There is still considerable weakness evident in all the other price components, which warrants further monetary easing,” he said.

Analysts from Barclays Research said they remain concerned about low core inflation and PPI deflation in the economy, and expected the People’s Bank of China to further loosen its monetary policy. They forecast two cuts in the bank reserve requirement and two cuts in interest rates in the first half of the year.

In mainland markets, oil stocks made a broad retreat, with Sinopec Shanghai Petrochemical tumbling 2.4 per cent to 6.1 yuan, Sinopec easing 2.2 per cent to 4.54 yuan, and PetroChina ending down 1.7 per cent to 7.67 yuan.

In Hong Kong, I-Cable Communication, which runs Cable TV and internet business, soared 20 per cent to close at 60 HK cents, after parent Wharf indicated potential restructuring plans to combine its communication, media and entertainment business.

Looking ahead, analysts from Essence Securities said Thursday that investors are eagerly awaiting the results of the European Central Bank’s meeting later in the European business day. Further down the road, markets will also watch closely China’s new yuan loan figures in February for clues to the health of the economy. The figures are due out at the end of this week or early next week.