Hong Kong, China shares battered by regulation fears; yuan drops

SHANGHAI: Hong Kong's benchmark index and Chinese A-shares extended sharp losses to end at multi-month closing lows on Tuesday, as investors worried over the impact of tighter government regulations.

What started off as a sell-off in shares bled into fixed income and foreign exchange markets by Tuesday afternoon, sending the yuan falling through psychologically significant levels and pushing Chinese 10-year government bond futures down 0.35%, as traders scrambled to come to terms with the rout.

"I can only understand that domestic speculative longs have surrendered and stampeded in the face of uncertainty," said a Shanghai-based brokerage manager.

The onshore and offshore yuan turned around sharply from small gains against the dollar to weaken past 6.5 per dollar to more than three-month lows.

A trader at a foreign bank said the breach of the 6.5 level could lead to further weakness for the yuan.

"Banks are busy asking their clients to execute dollar conversions into yuan to take advantage of current prices," she said.

In equity markets, Hong Kong's benchmark Hang Seng Index fell 4.22% to its lowest close since November, bringing its losses since Thursday to more than 9.5%. The Hang Seng China Enterprises Index closed 5.08% lower.

Hong Kong stocks bounce after hefty losses

The Hang Seng Tech index slumped through its previous record low to end down 7.97% on the day. It has lost more than 16% since Thursday's close.

The Hang Seng's losses accelerated in late afternoon trade after index heavyweight Tencent announced that its WeChat app has temporarily suspended registration of new users in mainland China as it undergoes a technical upgrade "to align with relevant laws and regulations".

Tencent ended the day 8.98% lower, its steepest daily drop since October 2011.

Food delivery platform Meituan fell 17.66%, its biggest-ever daily drop, after China's market regulator announced a set of reforms to strengthen protections for food delivery workers.

The Hang Seng Healthcare Index also recorded a record drop, falling 9.25% as investors feared the sector could be the next target of stricter government oversight.

In mainland markets, China's blue-chip CSI300 index ended down 3.53% at its lowest close since November, extending Monday's 3.2% sell-off. The Shanghai Composite index gave up early gains to end 2.49% lower at 3,381.18, its lowest close since March 25.

Falls were wide-ranging, with the CSI financial sector sub-index down 3.17%, the consumer staples sector off 4.75% and the healthcare sub-index down 3.9%.

The rout came after a shakeout on Monday spurred by new rules reining in China's $120 billion private tutoring sector, sending some shares plunging more than 45%, and new regulatory moves targeting technology and property.

"Beijing's severe crackdown on the tech and education sectors had ignited the re-pricing of significant regulation risks on investment for Chinese private companies," Ken Cheung, chief Asian FX strategist at Mizuhuo Bank, said in a note.

"As such, foreign investors will request a deeper discount on such Chinese investment or even cut the exposure on Chinese companies," Cheung added.

Education shares continued to slide on Tuesday, with New Oriental Education & Technology Group Co falling 8.63%, taking its drop over the last three sessions to more than 70%, while the CSI education index tumbled 4.97%.

WORST-CASE SCENARIO

Anita Chu, an analyst at CCB International, said in a research report that the unfavourable regulatory environment could force firms to spin off after-school tutoring operations or even delist, and issued a downgrade and reduced the target price for New Oriental.

"According to our estimates, the potential spinoff of (after-school tutoring) operations would take 60-70% off the earnings of New Oriental and 80-90% off (New York-listed) TAL Education."

In Hong Kong, heavily indebted developer China Evergrande Group extended its losses, spiralling 13.41% lower to end at 4-1/2 year lows, after the company said it would cancel a special dividend proposal.

Adding to broader concerns about the economic outlook, profit growth at China's industrial firms slowed for a fourth straight month in June, as high raw material prices weighed on factories' margins.

A surge in highly contagious Delta variant COVID-19 cases centred on the eastern city of Nanjing also spurred fresh worries on Tuesday.