Shanghai and Hong Kong shares fell on Thursday as a cash crunch in the mainland's financial system weighed on the markets and a slowdown in trading activity kept investors on the sidelines. Shanghai's key stock index fell 0.8 percent, finding support at its 250-day moving average. Hong Kong's Hang Seng index fell 0.6 percent, reversing slim gains from earlier in the day as turnover faded to its lowest in six months.
China's benchmark short-term money market rate spiked more than 149 basis points to its highest level in over two years, as traders reported a sharp shortage of funds in the banking system after a series of monetary tightening steps. "A prolonged liquidity crunch like this will disrupt normal corporate funding activities," said a trader at a state-owned bank.
In Hong Kong, gains in retailers and property bellwether were not enough to offset weakness in heavyweighted financials which were broadly lower. Ping An Insurance, down 1.7 percent and the top drag on the Hang Seng, continued to face profit-taking pressures. Ping An shares, up 22.6 percent this year, have the best returns among large cap financials in Hong Kong in 2010.
China Construction Bank, the top performing bank with gains of 6 percent this year, fell 0.7 percent. Sandra Cai, banking analyst at Samsung Securities, said uncertainties over the impact of regulations on earnings remain high and would continue to cloud market sentiment.
Earlier this week, sources told Reuters that China's central bank is considering new ways to manage bank credit while local media carried reports that banking regulators had imposed new risk weightings on local government loans. Offsetting some of the weakness in financials, consumer goods exporter Li & Fung rose 2.3 percent after its unit bought Italian fashion house Cerruti for 53 million euros ($70 million) from US fund MatlinPatterson.
The deal follows the recent pattern of Chinese firms targeting distressed western brands as they seek to grow those businesses in China. Some energy-related shares extended recent gains in Hong Kong as oil hovered near two-year highs and expectations grew that prices would hit $100/barrel in 2011. "Momentum is your friend. Outperforming resources should continue their positive run," said a trader at a large European bank in Hong Kong. Petrochina shares rose 0.4 percent while Datang Power rose 1.1 percent.