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China stocks rise despite Moody’s rating cut while Hong Kong stocks trade near 22-month high

Shanghai stocks rise as tech and defence shares advance

PUBLISHED : Wednesday, 24 May, 2017, 10:08am
UPDATED : Wednesday, 24 May, 2017, 10:13pm

Hong Kong and mainland stocks rose on Wednesday even after Moody’s Investors Service surprised markets by cutting China’s credit rating on what it said was a worsening debt outlook.

The Shanghai Composite Index gained 0.1 per cent, or 2.13 points, to 3,064.08 as advances from the technology sector outweighed pressure from insurers following a recent rally.

Moody’s Investors Service downgraded China’s long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3. The ratings agency also changed the outlook to stable from negative.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” the ratings agency said in a statement.

Although China’s progress on reforms could transform its economy and financial system over time, it is unlikely to prevent “a further material rise” in economy-wide debt, and the consequent increase in the government’s contingent liabilities, the ratings agency said.

Responses from the onshore currency and bond markets were fairly muted showing that onshore participants pay scant attention to Moody’s or other international rating agencies, AXA Investment Managers said in a research note.

“The combination of financial deleveraging and long-term hopes on structural reforms is supportive to our cautiously constructive view on China, and is perhaps the key reason why Moody’s has placed China on outlook stable after [the] rating cut,” AXA Investment Managers analysts including Jim Veneau said.

Credit Suisse head of China research Vincent Chan said it was difficult to envisage China getting into a financial crisis situation similar to other Asian countries in 1997 and some European countries in the past few years, because with little external debt and a semi-closed capital account, China has time to deal with the leverage problem.

Tech and defence shares advanced, with Inspur Software up 4.8 per cent to 21.38 yuan, China Avionics Systems rising 2.8 per cent to 14.61 yuan, and Avic Heavy Machinery gaining 2.3 per cent to 13.09 yuan.

But New China Life Insurance and China Life Insurance fell 0.5 per cent and 0.2 per cent separately to 40.80 yuan and 25 yuan.

Among other major stock indices, the CSI300, a gauge of large companies, was little changed at 3,424.17 points.

Of Shenzhen market indices, the Shenzhen Composite Index and the start-up board ChiNext index both ended higher, rising 0.5 per cent and 1 per cent respectively to 1,798.87 and 1,776.28.

Meanwhile in Hong Kong, the Hang Seng Index erased earlier losses, edging up 0.1 per cent, or 25.35 points, to 25,428.5 points at the close, which is near Tuesday’s intraday level of 25,486.98 that was the highest since July 2015.

The Hang Seng China Enterprises Index, known as the H-shares index, was little changed at 10,390.87 points.

Chinese internet giant Tencent Holdings eased 0.6 per cent to HK$273.60, retreating from a record HK$280.60 hit during intraday trade on Tuesday.

Chinese carmaker Geely Auto opened higher, but ended flat at HK$11.66, halting a three-day winning streak. Malaysia’s DRB-Hicom agreed to sell a stake of almost 50 per cent of carmaker Proton to Li Shufu’s Zhejiang Geely, Bloomberg reported, citing people with knowledge of the matter.

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