Hong Kong and China shares fell on Wednesday and could test lows for the year this week as investors keep selling heavily weighted bank stocks on tighter monetary policy and taking defensive positions in the market.
China's benchmark short-term money market rates spiked to the highest level since late February in the wake of the sixth increase in reserve requirements late on Tuesday, triggering an increase in funding costs for Chinese banks.
Three of the largest Chinese banks were among the biggest drags on the benchmark Hang Seng Index on Wednesday.
"People are far quicker to cut positions than, say, a year ago," said Andrew Sullivan, director of institutional sales at OSK Securities in Hong Kong.
With the Hang Seng Index closing down 0.7 percent to 22,343.8 points on Wednesday and trapped below its 250-day moving average and the 2011 low hit in mid March, investors are allocating funds to defensive sectors such as utilities.
They are also paying for relative safety, with current dividend yields for both Power Assets and CLP Holdings running at about 3.8 percent, well above the 2.6 percent average for the Hang Seng constituents, traders said.
While longer-term investors have cut positions, short-sellers have ramped up activity in Hong Kong, particularly in the banking sector, partly because shares in the sector are among the most liquid in the market, making them easy to borrow. China Construction Bank shares saw short-selling as a percentage of total turnover hit 10.2 percent on Tuesday, well above the 4.5 percent average seen over the past three months.
The Chinese central bank's move to raise banks' reserve rates after the Shanghai market closed on Tuesday also triggered a broad sell-off, dragging China shares broadly lower, but reasonable valuations are seen capping investors' bearishness.
The Shanghai financial sector index lost 1.3 percent, with Bank of China the biggest weight on the benchmark Shanghai Composite Index, with its 0.6 percent decline on the day.
The stock is now trading at 6.5 times its forward 12-month earnings basis, according to Thomson Reuters Starmine. This is its lowest valuation and represent a 45 percent discount to their median valuations since it listed in 2006.
The Shanghai Composite Index finished down 0.9 percent to 2,705.4 on Wednesday in tepid volume, holding above the 2,700 level that it has bounced off in two of the last three sessions.