Date
23 January 2017
A 2.5 percent decline in Hong Kong stocks is modest and could be a temporary correction in the bull market. Photo: Internet
A 2.5 percent decline in Hong Kong stocks is modest and could be a temporary correction in the bull market. Photo: Internet

June market correction likely but no big slump

Hong Kong stocks tumbled 555 points in the first week of May, coinciding with the release of lackluster manufacturing data.

Sentiment was further dampened by new listings which drained capital from the market, tighter margin trading rules and rumors of an impending increase in stamp duty.

At the close of the month, however, the stock market ended with only a modest loss.

The People’s Bank of China cut interest rates by 0.25 percent on May 10.

The Hong Kong stock market quickly rebounded after the news but continued to trade sideways for the next two weeks.

Last week, stocks rallied 3 percent to climb back above 28,000 after securities regulators on both sides of the border agreed to recognize funds in each other’s jurisdiction. The agreement will take effect on July 1.

However, a series of negative factors — capital drain, margin trading restrictions and Central Huijing’s disposal of mainland banking stocks — drove the index into a three-day tailspin.

The Hang Seng Index traded between 27,191 and 28,525 points and closed at 27,424 points in May, down 2.5 percent or 708 points from April.

That snapped a four-month winning streak.

The Hang Seng China Enterprise Index hovered between 13,667 and 14,963 points and closed out May at 14,103, down 2.3 percent or 327 points from the previous month.

The 2.5 percent decline is modest and could be a temporary correction in the bull market.

On the other hand, Chinese companies are rooting for a bull market in A shares amid an economic restructuring that is squeezing the funding pipeline.

Debt-laden Evergrande Real Estate Group (03333.HK) saw its share price double in the past three months, at one point peaking at HK$8.40.

It has been using the opportunity to issue shares to raise money and reduce debt.

However, a May 27 share placement was not well received by investors, forcing the company to cut the issue price to HK$5.67 per share, down nearly 18 percent from the stock’s last closing price of HK$6.91, and larger than a planned 8-10 percent discount.

That the company went ahead with the issue anyway shows it badly needs the money.

Evergrande’s net gearing ratio fell to 230 percent after the share sale, which is still high, according to Bank of America Merrill Lynch.

The company may consider a further block trade if the share price continues to rise, analysts said.

The market is unlikely to post sharp falls in June thanks to supportive government policy and the upcoming launch of Shenzhen-Hong Kong Stock Connect.

This article appeared in the Hong Kong Economic Journal on June 1. 

Translation by Julie Zhu

[Chinese version中文版]

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JZ/JP/RA

Department of Investment Analysis at HKEJ

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