Yesterday marked the longest losing streak in 4½ years for Hong Kong stocks amid concerns that slowing growth and a worsening credit crunch on the mainland would hit earnings.
"Nothing is positive right now and the valuation is not the lowest yet," said Alma Yang, a portfolio manager at Shenyin Wanguo Asset Management, adding cyclical shares like oil and coal producers may fall a further 20 per cent.
UOB Kay Hian strategist Steven Leung said 20,000 was a "resistance level", but it would be breached if the US bond yield rises further in the near term.
The US Federal Reserve cut its unemployment rate forecast by about 0.2 percentage point this week, triggering speculation Washington would start tapering its asset-buying programme in December. That, in turn, sparked a global sell-off in equities and gold as investors moved capital into US Treasury bonds as bond yields rose sharply.
Yesterday's slide extended the HSI's decline to a sixth consecutive week. The week's 3.37 per cent drop marked its longest losing streak since October 2008.
Elsewhere in Asia, Japan was the only major market that rose, with the Nikkei-225 Index adding 1.66 per cent.
Property developers and landlords were hit the hardest yesterday on concerns over a possible rate increase in the US. Wharf Holdings fell 4.6 per cent while Cheung Kong (Holdings) lost 1.6 per cent. Zijin Mining shed 4.8 per cent to finish at HK$1.60 as gold prices fell to their lowest level since September 2010 in response to a stronger US dollar.
Mainland banks, which are trading at a record low of around the price-to-book-value, recovered some ground after Thursday's heavy selling. China Construction Bank edged up 0.78 per cent to HK$5.19, while Industrial and Commercial Bank of China added 1.1 per cent to HK$4.62.
But market observers said shares might fall further as the interbank rate spike was likely to mark the start of a credit crunch in the country. The interbank market reached a 10-year high on Thursday, with the one-day repurchase rate - a measure of interbank fund availability - rising to 30 per cent. "Bank stocks may fall further if there is more liquidity crunch," UBS analyst Irene Huang said.
Turnover on the Hong Kong bourse jumped to a three-month high of HK$97 billion yesterday as investors cut positions in panic and hedge fund managers rushed to short stocks. The short-selling ratio fell from a 15-year high on Thursday but was still high at 13 per cent.
Deutsche Bank economist Jun Ma expects China's industrial activity to remain weak in the next month or two because of low export orders and inventory de-stocking. "The excessively high interbank rates in recent weeks, due partly to seasonal factors but also because of the insufficient liquidity injection from the [People's Bank of China], may have already had a negative impact on bank lending and corporate funding," Ma said.