Hong Kong and China stocks finished largely flat with declining volumes on Tuesday as Chinese banks holding hefty local government debt were seen as unattractive in the near term even as market players remain optimistic about China's economy. The first-ever comprehensive review of the massive debt of local governments was released by China's chief auditor on Monday, marking a major step in efforts to head off defaults that might destabilise the economy.
Chinese banks, often seen as a barometer of the world's second-largest economy, was the standout underperformer in China on Tuesday, with the Shanghai financial sector index down 0.33 percent while the benchmark Shanghai Composite Index which closed up 0.04 percent. Bank of China, down 0.93 percent on the day, was among the top drag on the Shanghai Composite. In Hong Kong, three of the "Big Four" Chinese banks also lost ground, with Chinese Construction Bank (CCB) weighing the most on the Hang Seng Index.
"We see an opportunity coming that we've been waiting for a long time in Chinese equities," said Howard Wang, head of the Greater China team at J.P. Morgan Asset Management, which owns large long positions in property, banks and commodities. "Valuations are cheap, lots of contrarian things you can do and there is secular growth," Wang told reporters at a press conference.
China shares, underperformers against the rest of Asia over the first three weeks of June, staged a mild rebound last week as bargain hunters stepped in. But a steep liquidity squeeze in mainland money markets, partly due to banks being required to keep aside more reserves, has cut into funds available for investment in stocks, keeping markets on the backfoot despite attractive valuations.
In a note on Tuesday, HSBC suggested that recent data points to inflation, not growth, as the bigger risk for the world's second-largest economy, projecting a 9 percent GDP growth for China this year and next. "If that is right, there should be many interesting buying opportunities among stocks that have overreacted to the recent jitters," said Garry Evans, HSBC's Global Head of Equity Strategy. He named China Resources Cement, China State Construction, technology companies ZTE and Spreadtrum as well as port operator Cosco Pacific as attractive.
In Hong Kong, the benchmark Hang Seng Index finished up 0.09 percent at 22,061.78 points as turnover declined for a second-straight session. Less than half of its 46 constituent stocks recorded volumes exceeding the 30-day average. Meat processor China Yurun Food Group Ltd was among the heaviest-traded counters for a second day running. It lost almost 6 percent in more than 15 times its average 30-day volume, extending the stock's 20 percent tumble on Monday amid speculation it was a short-selling target. A slew of research reports on Tuesday reiterating support for Yurun failed to stabilise the stock.