Another shoe dropped Wednesday when China raised interest rates for the third time this year. The move will shake up the gateway Hong Kong market at a time when there were mixed signals about a July rally.
The slump came after big gains on Monday and the last day of trading last week helped lift the Hang Seng almost 6% from its year-low close of 21,600 on June 20. And there were indications before the latest announcement of a rate hike that sentiment was improving.
Sale of assets in Mainland banks CCB (0939) and Bank of China (3888) by Singapore State investing arm Temasek seemed to hurt market sentiment Wednesday. But the sales were well received, according to Eric Yuen, head of research at Guoco Capital.
“The results indicate the market has regained some confidence,” Yuen told Equities.
Other positive signs were strength in Chinese property stocks and healthy demand for IPOs in Hong Kong. Yuen said he saw the basis for a rally in July before the latest interest rate increase.
The question now is: Did the rate hike destroy the market’s improving confidence, or just bruise it? One reasonable assumption is investors will wait until June China inflation figures come out in a few days before moving too far one way or the other.
Experts widely expect Chinese inflation to peak at 6% or more in June. If it tops out higher than predicted, investors may wait until August or beyond for a solid indication inflation is under control and China’s monetary policy is easing before restarting the rally.
Tomorrow: A conversation with CCB International head of research, Peter So. End
DAILY FIX – Interest Rate Rise Shake Stocks
Hong Kong Blue Chips: -230, -1.0%, to 22,518, 07-06-11, Hang Seng Index
Chinese Stocks in Hong Kong: -244, -1.9% to 12,598, 07-06-11, HSCE Index
Shanghai Stocks: +0.2%, 2,816, 07-06-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +0.4 to 444.6, 07-05-11, Bank of New York Mellon, ADR Index-China
Insight: Sales of assets in big Chinese banks helped push stocks lower in heavy turnover. A Chinese interest rate hike will roil the market in coming days. KGI Research
Quotable: “As we cannot see any positive stimulus in the market, we believe that HK market will continue to range bounce in short term.” Core Pacific Yamaichi. 7-5-2011
Chinese Company to Watch: Chu Kong Steel Pipe (1838) “Our recent discussion with management reinforces our confidence on the turnaround story.” Guoco Capital. 7-5-2011
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN