China stocks edge up, Hong Kong flat

Hong Kong shares ended little changed on Wednesday as a cash crunch in the Chinese financial system kept mainland bank stocks under pressure, erasing early gains, with further losses seen possible in the short term. The benchmark Hang Seng Index has declined more than 10 percent in the last two months, breaking below important chart support levels as investors ignored attractive valuations, and kept shorting Chinese stocks, particularly large-cap banks.
Two of China's largest banks, Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) were among the biggest drags on the benchmark on Wednesday, even as a 5.6 percent rise in global sourcing company Li & Fung helped the index close up 0.04 percent at 21,860.0 points.
"Chinese banks will continue to suffer in the near term as monetary policy tightening looks like it will only peak sometime in the third quarter now," said Mark To, head of research at Wing Fung Financial Group. "Valuations are based on earning projections that might also be a bit too optimistic." With Chinese banks collectively accounting for about a quarter of the Hang Seng index weightings, Hong Kong's main stock index could be looking at further losses.
"Typically, it takes a year for monetary policy to work and that's at the end of August or September," said Arjuna Mahendran, HSBC's Head of Investment Strategy for Asia. "In the next few months, you will probably see a signal that their tightening policy has stopped, and inflation will start coming down. That will be a very bullish signal for emerging stock markets and bond markets in the year ahead."
Wednesday's top percentage gainer in the Hang Seng, Li & Fung rose as much as 11 percent before giving up half of those gains to close 5.6 percent higher as the company highlighted growth plans and announced five new acquisitions in a large investor day conference, the first of its kind. In Shanghai, an afternoon rally in oversold, heavyweighted financials allowed China shares to close marginally higher, but volume plunged to its lowest in 11 months with short-term borrowing costs hitting their highest levels in almost four years.
China's benchmark short-term money market rate jumped another 47 basis points to hit its highest since late 2007 for the second straight session, as demand heightened with banks preparing for mid-year cash calls to meet regulatory requirements, including a 75 percent loan-to-deposit ratio.
The benchmark Shanghai Composite Index edged up 0.1 percent to 2,649.3 points, pulling further from a nine-month low it hit on Monday even as A-share turnover was at its lowest since September last year. "Valuations may be more attractive now, but funds aren't buying yet because of a lack of direction in the market," said Wang Aochao, an analyst with UOB Kay Hian in Shanghai.
Two of China's biggest banks, Bank of China and Industrial and Commercial Bank of China (ICBC) were the two biggest supports on the benchmark, gaining 1.6 and 0.7 percent, respectively, in good volume. Wednesday's gains lifted Bank of China out of technical oversold territory where it has been languishing for the last two sessions. Its more than 7 percent loss in June to date pushed the stock's relative strength index below 12 on Tuesday, an all-time low and well below the threshold of 30 that indicates whether a security is technically oversold.