Hong Kong and Shanghai shares fell on Thursday weighed by tight cash conditions on the mainland although mild buying in large-caps helped China's benchmark stock index recover from a 33-month intra-day low hit during the session.
Liquidity in the Chinese markets is drying up as the central bank continued to drain funds, while year-end capital requirements of banks and borrowing by individuals and companies ahead of the Lunar New Year next month drove short-term rates higher, deterring stock buying.
The Shanghai Composite had fallen to a level last seen in March 2009 and closed down 0.2 percent at 2,186.3. "A key drag (in mainland markets) right now is tight short-term money supply in the financial system. This might persist right through the Lunar New Year at the end of January," said Zhong Hua, an equity analyst with Guotai Junan Securities in Shanghai.
The People's Bank of China drained a net 10 billion yuan ($1.6 billion) from the banking system this week, its fourth consecutive net drain, though down sharply from its 73 billion yuan drain last week. Tighter borrowing conditions have also discouraged retail investors on the mainland from getting back into a market that is vying with India and Taiwan to become Asia's worst performing stock index this year.
The Shanghai Composite is down 22.1 percent this year. A pick up in volumes around midday and large-caps outperforming sparked chatter again among traders that government-related funds were propping up the market after the benchmark dropped to fresh lows. On Wednesday, the Shanghai Securities News reported that China's National Social Security Fund (NSSF) plans to spend around 10 billion yuan ($1.58 billion) to boost local stocks.
Energy counters China Shenhua and Petrochina provided the biggest support to the index, up 1.4 percent and 0.5 percent respectively followed by ICBC which also rose 0.5 percent. The CSI300 index of the top 300 listed companies on the mainland and the benchmark on which Chinese futures are based ended the day up 0.1 percent.
The recovery in the mainland markets helped Hong Kong's Hang Seng index pare losses to close down 0.2 percent at 18,378.23. Turnover fell below HK$30 billion to the lowest this year. Volumes were relatively higher in Ping An which fell 1.8 percent after the insurer announced on Wednesday it was raising capital via convertible bonds. Short-sellers piled into the stock following the announcement with bearish bets rising to nearly a fifth of the total volume in the stock on Wednesday, according to data from the Hong Kong stock exchange.