Hong Kong stocks close week up 3pc on Fed-fuelled rally; China drops most in 3 months as yuan borrowing costs surge

Hong Kong stocks extend gains after hitting a 19-month closing high in the previous session

PUBLISHED : Friday, 17 March, 2017, 9:16am
UPDATED : Friday, 17 March, 2017, 9:39pm

Hong Kong stocks extended their rally on Friday to close the week with a 3 per cent gain, as analysts said capital is flowing back to Hong Kong equities on improved sentiment after the US Federal Reserve signalled a less hawkish stance on future rate rises.

However, Shanghai shares suffered their biggest daily percentage sell-off in three months, as the cost for mainland Chinese banks to borrow yuan from each other surged after the Chinese central bank tightened interest rates.

The Hang Seng Index ticked up 0.1 per cent or 21.65 points to end at 24,309.93, after rising to a 19-month high on Thursday. The previous rally came as concerns eased about a hawkish US central bank, after the Federal Reserve raised the benchmark interest rate by 25 basis points, as expected. The Fed also indicated it would stick to its previous forecast of two additional rate rises for the rest of this year.

HKMA nudges base lending rate 0.25pc higher, tracking US Fed move

For the week, the Hang Seng Index gained 3.1 per cent.

The Hang Seng China Enterprises Index, or H-shares index, dipped 0.1 per cent or 12.94 points to close at 10,513.52.

Daily turnover on the Hong Kong exchange increased nearly 20 per cent to HK$121 billion from Thursday.

“After the Fed’s statement, the Hong Kong dollar strengthened and Hong Kong stock market turnover increased. It shows that money is coming back to Hong Kong equities,” said Hannah Li, an analyst for UOB Kay Hian.

Concerns were elevated before the Fed’s move, as aggressive US tightening would prompt money to leave Hong Kong in search of higher yields, forcing Hong Kong to raise interest rates, and adding pressure to the city’s asset prices.

However, analysts and investment managers now believe massive capital outflows are unlikely and Hong Kong banks won’t raise interest rates immediately, as the Fed appears relatively dovish and local banks also have enough liquidity. Thus, the negative impact will be limited on Hong Kong’s equity and property prices.

The Fed’s relatively dovish stance provides an impetus to Hong Kong stocks, as investors are more willing to make big bets
Hannah Li, analyst for UOB Kay Hian

“The Fed’s relatively dovish stance provides an impetus to Hong Kong stocks, as investors are more willing to make big bets,” Li said.

Chinese online major Tencent Holdings hit an all-time high of HK$222.8 and closed at HK$222, up 0.5 per cent from the previous close.

China Unicom advanced 2.4 per cent to HK$10.3, after the company’s chairman Wang Xiaochu pledged to cut capital expenditure by 38 per cent this year to reduce costs.

However, car makers retreated from recent rallies, with Geely Auto down 10.1 per cent to HK$11.24.

On the Chinese mainland, stocks struggled Friday amid tight market liquidity.

The benchmark Shanghai Composite Index snapped a four-day winning streak, down 1 per cent to finish at 3,237.45. It was the index’s worst percentage drop in more than three months, narrowing its weekly gain to 0.8 per cent.

The large-cap CSI 300 Index fell 1 per cent to 3,445.81. The Shenzhen Component Index was also 1 per cent lower at 10,515.41. The Nasdaq-style ChiNext retreated 0.8 per cent to 2,029.73.

Combined turnover stood at 600 billion yuan (US$87 billion), versus Thursday’s 551 billion yuan.

Separately, the overnight Shanghai Interbank Offered Rate (Shibor), a measure of the yuan’s borrowing cost among commercial banks, jumped 19.2 basis points on Friday to 2.633 per cent. The one-month and one-year Shibor rates also rose 5.57 basis points and 1.94 basis points respectively, reaching 4.2775 per cent and 4.1246 per cent.

The surge in borrowing costs came after the People’s Bank of China followed the Fed’s action and raised money market rates on Thursday, a move widely regarded by investors as trying to reduce the interest rate differential between China and the US and stabilise the exchange rate.

“PBOC rate moves don’t follow a regular schedule and the timing, just hours after the US Fed tightened, suggests policymakers may also have hoped the move could help stabilise the renminbi,” said Mark Williams, chief Asia economist for Capital Economics.

“Capital outflows have tended to increase when the renminbi has weakened against the US currency,” he added.

On the mainland, car makers also weakened broadly, with Great Wall Motor down 3.8 per cent to 12.39 yuan, and SAIC Motor off 2.5 per cent to 24.37 yuan.

Elsewhere in the region, Tokyo’s Nikkei Average finished down 0.4 per cent at 19,521.59, while Sydney’s S&P/ASX 200 closed up 0.2 per cent at 5,799.6.