Chinese shares fall, Hong Kong flat

Chinese shares fell on Wednesday, snapping a six-day winning streak and erasing gains in Hong Kong, with investors selling Chinese bank stocks after rumours about an interest rate hike in early July compounded simmering fears about soured loans.
But some market players remained optimistic on Chinese equities, believing any potential losses the banks suffer on bad loans will be manageable, especially since their loan books have a relatively low proportion of non-performing loans. Chinese banks can earn their way out of any potential trouble in a way that US banks are only starting to do, said Norman Villamin, RBS Coutts' head of Asia investment strategy.
Bank of China and China Construction Bank (CCB) were the top drags on the benchmark Hang Seng Index, which finished flat at 12,404.52 points. The China Enterprise Index dipped 0.7 percent, and the Shanghai Composite Index closed down 1.1 percent at 2,728.48 points. Seven banks were among the top eight biggest drags on the Shanghai Composite, with mid-sized banks, which are generally viewed as more likely to suffer the brunt of bad debt losses, hit harder. China Minsheng Banking Corp lost 4.2 percent, while two of China's largest banks, Industrial and Commercial Bank of China and Bank of China lost 0.9 and 1.3 percent respectively.
Results of a government audit on Monday showed local Chinese governments had racked up about 10.7 trillion yuan of debt. But while non-performing loans at Chinese banks is seen possibly rising up to 5 percent of total lending from around 1 percent currently, it will not affect their credit ratings, Moody's Investors Service said on Tuesday. Sagging volumes in both China's and Hong Kong's markets for a third straight session suggested investors remained cautious.
"The market is moving in fits and starts because people seem to be having second thoughts on buying," said Christian Kielland, head of Asia trading at BTIG in Hong Kong. "Greece is not the biggest problem right now. Rather, investor impressions of growth are probably more important," he said, referring to the European's country's sovereign debt crisis.
Manufacturing data from the United States and China will likely set the stage for investors to become more optimistic, with good corporate results next month setting the stage for a more sustainable leg up for the markets, said analysts.
A Reuters survey of 16 economists, ahead of the official release of China's purchasing managers' index figures for June on Friday, suggests growth in Chinese factories cooled to 10-month low. But a median forecast of 51.3 still pointed China's vast manufacturing industry expanding for the 28th straight month.