Chinese Shares Fall, Drags Down Hong Kong

Reuters has reported that Monday saw Chinese shares fall by nearly 5 percent. This happened after China took further steps to curb the booming real estate market. Property stocks were beaten down and the Hong Kong market was dragged down too. China has instructed local governments to take steps to curtail all speculative transactions in the real estate market. This saw the property sector index fall by 6.8 percent and the Shanghai Composite .SSEC go down by 4.8%, its biggest one-day fall in eight months. In order to control the speculation going on in the property market, banks have been told by the State Council to take steps to increase down payment requirements and also hike mortgage rates.

Xu Yinhui, an analyst with Guotai Junan Securities said, “The market is reacting to news of the clampdown in property.” China had launched its first stock index futures on Friday and it is the view of traders that Monday’s sharp fall in the market was accentuated by heavy short-selling in the new stock index futures. Zhang Qi, an analyst at Haitong Securities said “Heavy short-selling in futures has caused a bearish atmosphere in the spot market.” Considering the fact that last week’s data showed China’s recovery process is in robust shape, any sustained fall in the markets is not expected by traders. Banking stocks were hammered as a fall out of the fraud charges against Goldman (NYSE: GS) by the SEC in the U.S. There was also concern that with the government trying to curtail the property markets, banks may see an increase in bad loans having lent huge amounts to property companies as well as home owners.

As China stocks fell, Hong Kong shares also extended their losses. The benchmark Hang Seng Index, HSI, saw a decline of 2.1 percent, the biggest one-day fall in two months. Linus Yip, strategist at First Shanghai Securities, said, “Sentiment turned sour as China's market fell further. Investors' appetite for risk reduced and retreated from aggressive buying in a policy sensitive market.” Yip added that he is expecting further decline as buyers remain on the sidelines. His advice to investors is to raise their cash positions as the market outlook turns murky.

Conita Hung, head of equity research at Delta Asia Financial, said, “The next move of the market will be dictated by China stocks while investors will stay alert to any news from the U.S.” On Monday, the State Administration of Foreign Exchange said that China could see increased foreign exchange inflows this year as expectations for yuan appreciation are mounting. Analysts are of the opinion that markets will find support based on expectations of higher capital inflows into the local as well as Chinese markets as the Chinese yuan appreciates.