Hong Kong shares are expected to plumb new lows this week, shaken by political uncertainty after Beijing said it would review how the supposedly self-governing city's leader and legislature are chosen.
Angered by demands for more democracy, top officials of the National People's Congress will deliberate this week draft interpretations on two articles of the Basic Law, Hong Kong's mini-constitution, involving its political development after 2007, the official Xinhua news agency said on Friday.
"The market will interpret this as meddling in local political affairs, it could cause disputes and protests," said Ben Kwong, associate director at KGI Asia Securities.
The unprecedented exercise of China's parliamentary power to interpret the Basic Law comes at a time of growing calls for universal suffrage in the freewheeling former British colony following protests by half a million people last year.
Democracy activists have demanded a firm timetable on the election of the territory's top leadership, including the chief executive post now held by the unpopular Tung Chee-Hwa.
Domestic-focused property and banking stocks such as the city's largest developer Sun Hung Kai Properties Ltd are likely to bear the brunt of selling.
"Beijing's move comes at a bad time, the market is already nervous about the situation in Taiwan," said Kwong.
Political turmoil and protests in Taiwan following a contested presidential election unsettled investors here last week, pushing the blue chip Hang Seng Index to its lowest level since December 2003. Tensions in Taiwan could ease after President Chen Shui-bian, who was re-elected by a wafer-thin margin, said he would agree to a recount on Saturday and as a week-long protest outside the presidential office came to an end on Sunday.
Traders said they see the Hang Seng trading between 12,100 to 12,700 points this week, with Friday's mixed performance on Wall Street likely to weigh early on. Hong Kong shares often move in tandem with their US counterparts as the local currency is pegged to the greenback.
Cars, beer and hotels would be in focus with annual earnings reports due from auto maker Denway Motors Ltd, luxury hotelier Shangri-La Asia Ltd and China's largest brewer Tsingtao Brewery Co Ltd.
Despite a strong start, the Hang Seng has lost 0.74 percent this year, making it one of Asia's worst performing markets. Last week it fell for a fourth consecutive week, shedding 2.4 percent to 12,483.24.
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