China's key stock index fell 0.7 percent by midday on Tuesday as investors cashed in on recent gains amid lingering worries that Beijing may take fresh steps to cool a liquidity-driven asset price rally. Hong Kong's benchmark Hang Seng Index ended the morning little changed with weakness in energy counters following lower oil prices offset by gains in airlines after an upbeat earnings forecast from Cathay Pacific Airways.
The Shanghai Composite Index dropped to 2,993.8 points, still struggling after a 5.2 percent loss on Friday, its biggest single-day fall in 14 months, sparked by fears of more interest rate hikes. Jihua Group, China's biggest military supply provider, was the morning's most actively traded stock, dropping 4.7 percent as nearly 600 million institutional shares in the company were converted into free float on Tuesday after a lock-up period.
As monetary tightening is typically seen as negative to banking stocks, Agricultural Bank of China, the second-most active stock, fell 1.82 percent in line with declines in all banks listed in Shanghai and Shenzhen. "Friday's dive is a big killer and has effectively terminated the market's rally seen since early October," said Chen Shaodan, a senior analyst at China Development Bank Securities in Beijing.
"The market is now caught between ample liquidity and worries over monetary tightening," she said. "It should have little potential to rise further but it also has no big room to fall, so it is likely to see rangebound trading for some time." Analysts expect the Shanghai Composite to move in a range of 2,900 to 3,100 points for the next few sessions or possibly even weeks.
Driven mainly by strong market flows, the index has jumped nearly 20 percent since early October before its tumble on Friday. The rally has not seen much of correction. But in a sign that investor interest in stocks was waning, turnover of Shanghai A shares tumbled to 103 billion yuan ($16 billion) from Monday morning's 113 billion yuan and Friday's morning's 164 billion yuan. Daily turnover hit record highs of nearly 300 billion yuan in recent sessions.
Companies in sunrise industries jumped after the Shanghai Stock Exchange said this week that it would launch a new index on 380 blue chip companies in expanding sectors including clean energy, biology, information industry and high technology. Drug maker Chongqing Taiji Industry (Group) Co, one of the morning's top gainers, jumped its 10-percent daily limit after the government recently issued a slew of new policies to support sunrise industries.
The Hang Seng ended the morning session marginally lower at 24,012.87 points. "People remain cautious because the swings in China are radical in the last few days," said Jackson Wong, investment manager at Tanrich Securities in Hong Kong. "People are still trying to figure out if this is the beginning of a downtrend or not." The Hang Seng Index's relative strength index (RSI) stood at 54, below the threshold 70 level indicating that the market was in oversold territory. The RSI had risen to around 76 earlier this month, spurred by expectations of more cheap funds flowing into emerging markets from the US.
The index had fallen nearly 4 percent since it hit 29-month highs earlier this month. Cathay Pacific Airways Ltd soared nearly 5 percent. Hong Kong's flagship carrier said that net profit for 2010 will be HK$12.5 billion ($1.6 billion) or more, as business rebounds following the global downturn.
Riding on Cathay's optimism, Chinese airlines were also higher. AirChina was up 2.3 percent. Lenovo slid 0.9 percent. Private equity firms TPG Capital and General Atlantic are looking to exit the world's No 4 PC brand, with a $201 million share placement, sources said on Monday. Oil counters slipped after prices dropped as the US dollar gained. PetroChina slid 1.1 percent and CNOOC lost 0.8 percent.
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