Shares in Shanghai and Hong Kong eased on Thursday, weighed by profit-taking in financials, as investors worried that draining of cash by China's central bank may lead to tighter liquidity in the near-term. The People's Bank of China stepped up open market operations to mop up cash from the money market, its first weekly drain in four months, putting a dent in one of the key tailwinds behind the run-up in Chinese shares this year.
The weak mainland market put pressure on Hong Kong's Hang Seng which closed down 0.8 percent and was also led lower by banks, in particular heavyweight HSBC. HSBC shares fell 1.4 percent, the biggest drag on the Hang Seng, with losses accelerating in late trade after Moody's downgraded Spain's sovereign debt rating and warned of further cuts.
Financials were the hardest hit in Shanghai but the analysts called it a short-term decline, adding that valuations are still in favour of the sector. The sector sub-index fell 2.5 percent led by ICBC down 1.6 percent and Bank of China which fell 2.1 percent. Tepid turnover on the Hong Kong stock exchange, down 7 percent from Wednesday, suggested that some investors preferred to wait for inflation data that is scheduled for Friday for a sign that the rate of growth of consumer prices is slowing.
China was confident it could hold inflation to an average of 4 percent this year, the government's statistics chief said on Thursday, but a central bank adviser warned that soaring commodity costs were adding to upside risk. While the optimistic outlook on Chinese shares had not changed, as reflected in light turnover on the bourses, a derivative trader at a European bank in Hong Kong said it was a good time to hedge some risks.
Put options in Hong Kong were cheaper said the trader because volatility was still low and recommended selling calls to fund put purchases - known as a risk reversal trade - as protection in case volatility picks up ahead of planned protests in Saudi Arabia. Unrest in the Middle East pushed up oil prices again but energy-related stocks fell in Hong Kong and China as concerns grew over the impact on oil majors' refining margins.
The sector continued to drag on the benchmarks with CNOOC down 1.3 percent in Hong Kong while Sinopec, China's largest refiner by market value fell 1.8 percent. CNOOC shares were further pressured by news that London-listed Tullow Oil Plc was still awaiting approval from the Ugandan government to bring in CNOOC and Paris-listed Total as partners in a key $10 billion project.