Hong Kong and China stocks deepen losses after across the board sell-off on Federal Reserve stimulus warning

·4-min read

Hong Kong and China stocks slumped, taking cues from a sell-off in US equities, amid fears that policymakers are not doing enough to further power economic recovery and a resurgence of the coronavirus pandemic will derail growth. The mainland’s markets also fell on concern authorities will stiffen penalties against financial crimes.

The Hang Seng Index lost 1.8 per cent, or 431.44 points, to 23,311.07, for the lowest close since May 29 on Thursday. The mainland’s Shanghai Composite Index declined 1.7 per cent to 3,223.18, the lowest in two months.

Other major markets in Asia also fell, with South Korea’s Kospi index tumbling 2.6 per cent to make it the region’s worst performer. The S&P 500 slumped to an eight-week low in overnight trading, extending its loss to 10 per cent from a recent high. A 10 per cent drop is typically seen by some technical traders as entering a correction. Other asset classes from crude oil to gold all slipped, while investors snapped up the US dollar as a haven, setting a gauge of the American currency on course for its biggest monthly gain since April.

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While Federal Reserve chairman Jerome Powell said earlier that the world’s largest economy has a long way before fully recovering and requires more support, the chance of a new fiscal stimulus seems to be fading before a contentious presidential election. Meanwhile, a recent increase in rising cases of Covid-19 in the US and other nations added to the weak sentiment, with some European countries imposing more social distancing measures.

“Fading prospects for US fiscal stimulus and the stepping up of mobility restrictions on concerns about the second wave of Covid-19 are smacking global stock markets again,” said Stephen Innes, a strategist at AxiCorp. “Risk market losses, especially US equity losses, signal that all the possible juice that can be extracted from declining real rates has already been squeezed.”

The sell-off was across the board in Hong Kong, with 44 out of the 50 members on the Hang Seng Index falling. Wuxi Biologics and smartphone maker Xiaomi topped the list of decliners, losing at least 4.8 per cent.

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On the mainland, traders rushed to unwind their holdings of small-caps, which are typically targeted by speculators because of the small proportion of free-floating shares, after Premier Li Keqiang said on Wednesday that Beijing would ramp up a crackdown against stock manipulation and insider trading. Just a day later, the supreme court singled out seven major cases linked to stock and futures trading, echoing Li’s call and showcasing its determination to clamp down on market excesses.

Zhengzhou Sino-Crystal Diamond, a smaller company on the ChiNext board, shed 19.9 per cent to 5.71 yuan after the Shenzhen bourse restricted the trading of a retail investor who was found to have manipulated the stock this month.

All four IPO debutants – Beijing TopNew Info&Tech, Zhejiang Songyuan Automotive Safety Systems, Pinlive Foods and Friend Co. – surged on the mainland’s exchanges. Beijing TopNew, an operator of data centres, was the best performer, jumping 446 per cent from its offer price to 69.09 yuan on Shenzhen’s ChiNext board. Zhejiang Songyuan, a car parts maker, surged 205 per cent to 41.10 yuan. Pinlive Foods, a food retailer, gained 189 per cent to 77 yuan, while Friend, which provides steel logistic supply-chain services, climbed 44 per cent to 15.70 yuan.

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