Rumours about mainland rate increase put downward pressure on China-linked shares Hong Kong stocks ended lower as investors remained cautious ahead of a US Federal Reserve meeting late yesterday and rumours about a mainland rate rise put pressure on China-linked shares. A recent rebound in the United States dollar, which has led to a decline in commodity prices, also sparked selling of resources stocks such as Aluminum Corp of China (Chalco), Jiangxi Copper and gold miner Zijin Mining. The Hang Seng Index closed 57.88 points, or 0.42 per cent, lower at 13,776.47, having traded in a narrow 65-point range throughout the day. Still, DBS Vickers Securities sales director Peter Lai Wing-leung, said there was good buying support from long-term funds whenever the blue-chip index got close to 13,700. Yesterday, investors were particularly keen on picking up shares in Swire Pacific after the property conglomerate fell to $64.50, Mr Lai said. The counter bounced back up to $65.50 on that support but finished down 1.14 per cent at $65. Others were not so optimistic, describing the market as 'weak' and 'directionless' while noting that turnover remained thin at only $14.76 billion. 'The [HSI] futures went from no discount to a 37-point discount and that is definitely not a good sign,' said Francis Lun Sheung-nim, general manager of Fulbright Securities. 'The market is worrying Hong Kong banks will follow the Fed and raise interest rates again.' The US central bank was widely expected to increase its Federal Funds target rate by another 25 basis points to 2.75 per cent at yesterday's monetary policy meeting. In the run-up to the meeting, the US dollar also strengthened on speculation the Federal Reserve would drop its long-term wording that US interest rates needed to go up at 'a measured pace' - a move that would indicate a more aggressive tightening cycle ahead. Analysts remained divided on whether this would be the case, but the bias seemed to be that the word 'measured' would survive yesterday's meeting as well. Local investors were trying to gauge whether Hong Kong banks would match the US rate rise after they raised their lending rates from Monday in a bid to partially offset a sharp rise in interbank rates. Some observers argued that that move meant Hong Kong banks were now set to mirror any further rises in the US, especially if the Fed signalled the pace of tightening would pick up. Others said the amount of liquidity in the Hong Kong banking system still gave them the flexibility not to do so. 'The market focus is on the Fed and whether the capital outflow [from the banking system] will accelerate,' said First Shanghai Securities strategist Linus Yip. Further outflows would increase upward pressure on money market rates, raising the likelihood of another rise in lending rates, he said. Property stocks were mixed, with Henderson Land Development rising 0.85 per cent and Hang Lung Properties gaining 0.43 per cent, while Cheung Kong fell 1.05 per cent and Sun Hung Kai Properties lost 0.68 per cent. Banking giant HSBC Holdings finished unchanged at $125.50. Esprit Holdings gained 0.44 per cent to end at $56.50 - only 25 cents below its all-time closing high two weeks ago. After the market closed, chairman and founder Michael Ying again tried to cash in on the share price gains by offering to sell 80 million shares at a 3 per cent to 4.7 per cent discount - potentially raising as much as $4.38 billion. China Unicom closed unchanged at $6.30 after falling as much as 2.4 per cent during the day on news that it added only 1.41 million new mobile users last month, against 1.44 million in January. CNOOC was the worst-performing blue chip, falling 2.75 per cent to $4.42 as institutional funds took profit on oil producers even as the price of crude oil hovered above US$57. PetroChina fell 2.45 per cent to $4.97 and Sinopec shed 2.99 per cent to $3.25. The main drag on the China-linked shares was talk that the Peoples' Bank of China had decided to raise interest rates in the second quarter, which brokers said contributed to a 2 per cent fall in the mainland A-share markets. In Hong Kong, the H-share index fell 86.68 points, or 1.74 per cent, to 4,907.17, while the red-chip index declined 17.01 points, or 1.07 per cent, to 1,571.58. Chalco was the top loser among H shares, shedding 4.08 per cent to $4.70. Zijin Mining fell 2.92 per cent to $3.32 and Jiangxi Copper lost 1.73 per cent to $4.25. Jilin Chemical fell 5.10 per cent to $2.32.