Hong Kong, China stocks end lower amid bond default fears

China and Hong Kong stocks retreated on Monday with turnover shrinking as worries about corporate debt defaults triggered a sell-off in the bond market and concerns grew over tightened capital liquidity.

Investors also awaited clues from the Bank of Japan (BoJ) and the Federal Open Market Committee (FOMC) in the United States on their monetary policies in the meetings this week as well as China’s Purchasing Managers’ Index for April.

The Shanghai Composite Index lost 0.41 per cent, or 12.28 points, to end at 2,946.96, the lowest since March 18, while the CSI 300 tracking large caps listed in Shanghai and Shenzhen dropped 0.40 per cent, or 12.58 points, to 3,162.32.

The Shenzhen Composite Index lost 0.41 per cent to 1,859.90 and the Nasdaq-style ChiNext slid 0.47 per cent to 2,126.83.

Total turnover in Shanghai and Shenzhen dropped further, to 391 billion yuan (HK$466.02 billion), after falling to its one-month low of 422.3 billion yuan on Friday.

“The short-term liquidity is going tighter and investor confidence is weak in the Chinese stock market after last week’s sell-off in the bond market and a sudden drop in stocks,” said Xie Jinchao, A-share analyst at Lukfook Financial.

China’s bond market saw a sell-off, with bond rates surging, because of fears of more corporate defaults and concerns about high leverage in the bond market, HSBC Global Research said in a report.

“We are not convinced that the curve steepening trend [of bond yields] is over,” the report said.

Meanwhile, some capital flew to red-hot commodity futures although Chinese officials stepped out to cool down the market, Xie said.

Major sectors in China’s A-share market declined, including financial and telecommunications. Shares of materials providers also fell as China’s three commodity exchanges in Shanghai, Dalian and Zhengzhou raised charges on investors to cool trades of raw material futures.

The Hang Seng Index in Hong Kong was down 0.76 per cent, or 162.60 points, to 21,304.44 on Monday, dragged down by banking, insurance and coal sectors. Turnover fell to HK$55.91 billion, compared with HK$64.49 billion on Friday. The Hang Seng China Enterprises Index also retreated 1.48 per cent, or 134.58 points, to 8,986.33.

The main focus this week will be the BoJ and FOMC meetings, Andrew Sullivan, managing director of sales trading at Haitong International Securities said. “Most expect the FOMC to leave policy unchanged but everyone is looking for hints on when a rate rise may occur.”

“If the official PMIs stay expansionary, China’s pick-up appears to sustain…central banks’ easing will be less aggressive,” ANZ Research said in a note.

Shares of Chinese banks retreated ahead of their quarterly results. Industrial and Commercial Bank of China saw H shares drop 1.39 per cent to HK$4.25 while China Construction Bank shares shed 1.39 per cent to HK$4.98.

HSBC Holdings shares also lost 1.34 per cent to HK$51.45.

Real Nutriceutical Group shares rebounded 43.06 per cent to HK$1.03 as it reached an agreement with short-seller Glaucus Research Group California that the latter would not issue any more disparaging reports on the company.

Additional reporting by Celia Chen