Hong Kong shares are headed for their worst daily loss in seven weeks on Thursday, sinking deeper into the red after a preliminary private survey suggested manufacturing activity in China contracted in May for the first time since October. Chinese markets reversed losses to eke out slim gains at the midday trading break, helped by property counters such as China Vanke on expectations that home prices would rise further as developers hold back on supplies.
The CSI300 of the top Shanghai and Shenzhen listings was up 0.2 percent, while the Shanghai Composite Index gained 0.1 percent. Midday bourse volume was the weakest this week. The Hang Seng Index shed 1.6 percent to 22,879.7, set for its worst day since April 5 and down for a third day after closing on Monday at its highest since early February. The China Enterprises Index of the leading Chinese listings in Hong Kong sank 1.8 percent.
"I'm more concerned that the flash PMI came in below 50. It shows that growth is not picking up even after spending so much money," said Hong Hao, chief strategist at Bank of Communication International Securities. The flash HSBC Purchasing Managers' Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first time in seven months. The final HSBC PMI reading stood at 50.4 in April.
Chinese banks were among the biggest index drags, hurt on Thursday also by a news report that the country may remove the floor for interest rates by next year, a move that could potentially diminish interest margins. China Minsheng Bank slid 3.2 percent to its lowest in three weeks after a downgrade by UBS analysts from "neutral" to "sell" and a nearly 20 percent cut in their target price for its H-share listing.
"Increased leverage has played a critical role in boosting Minsheng's return on equity over the past two years. However, we think this strategy may face increasing risks in the context of a more challenging liquidity, economic backdrop," they said in a note dated Thursday. The grim mood weighed on the Hong Kong debut of Sinopec Engineering, which fell to HK$10.46, below its HK$10.50 IPO price, itself at the lower end of the marketed HK$9.80-HK$13.10 range.
But Huaneng Power stood tall, rebounding 5.7 percent from Wednesday's two-month closing low in Hong Kong. The Chinese power producer sector had slumped in the first three days of the week on fears of reduced margins from a potential tariff cut and a ban on lower quality coal imports. Morgan Stanley said on Thursday that a 2 percent cut in on-grid coal power tariffs could potentially cut earnings by up to 19 percent, but its 18 percent plunge over the last three days appears overdone. Chinese property developers listed in the mainland were among the bigger index boosts. China Vanke climbed 1.7 percent in Shenzhen, earlier testing its highest since February 5.
The Securities Times reported China that home prices in Beijing could rise due to a short term supply shortage as developers choose to wait out the policy uncertainty than to sell at a lower price. Lenovo Group shed 1 percent ahead of its quarterly results. At the midday break, the Chinese PC maker posted a 90 percent rise in quarterly net profit, its fastest pace in seven quarters. Up more than 3 percent on the year, Lenovo is currently trading at 13.1 times forward 12-month earnings, a 12 percent discount to its historical median, according to Thomson Reuters StarMine.