A near 7 percent slump in China shares listed in Hong Kong this week and meltdown in financial markets globally is putting investors on edge ahead of the reopening of mainland China markets on Monday after the long Lunar New Year holiday.
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Investors will be watching China's official yuan fixing for any signs that it may be allowing the currency to weaken again to support its ailing exporters. That will be followed by export and import data for January which should hit trading screens soon after stock markets open.
Worries about China's slowing economy and uncertainty over its foreign exchange rate policy were cited as key factors behind global markets' sudden fall in January. But in the past week, with China closed, additional worries have surfaced ranging from the health of European banks to doubts over whether central banks can dole out more effective stimulus.
The Hang Seng Index fell 1.2 percent to a three-and-a-half year low of 18,319.58 on Friday, while the China Enterprises Index lost 1.99 percent, to 7,505.37 points.
For the week, the Hang Seng index lost 5 percent.
"We are holding tight and not trying to get creative here as about half the stocks in our portfolio are trading near their cash value," said Michelle Leung, CEO of Xingtai Capital Management, a hedge fund focused on Chinese consumer stocks.
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Among the most actively traded stocks on Hong Kong's main board were China Merchants Holdings, Power Assets , Henderson Land and CLP Holdings.
The value of shares traded on the main board was HK$58 billion ($7.45 billion), lower than Thursday's HK$66.35 billion.
Hong Kong's financials sub-index, fell more than 2.3 percent on the day with shares in insurer AIA, Ping An and HSBC leading losers.
"We have been hit by a steady spate of bad news since the year began and I think the markets will remain in a state of flux in the near term until we see global bank shares stabilizing," said Francois Perrin, portfolio manager for East Capital Asia in Hong Kong.
Financial counters led the losses globally as disappointing earnings from Societe Generale extended the gloomy mood, even as some global central banks embarked on a policy of negative interest rates, adding a further headwind to lenders.
Hong Kong's assets have taken it on the chin in the opening weeks of the year due to increasing concerns about the economic slowdown in China. The city has strong economic ties to China but its stock markets are also a favorite playground for investors to execute their views on the Chinese economy.
"Where China fixes its currency next week will be key for Hong Kong's markets in the short term, but we need to see this selling pressure on bank stocks reduce before a meaningful rebound," said Sean Darby, chief global equity strategist at Jefferies Hong Kong.
Scotia bank believes the fixing will be "pretty low" compared to its last fixing of 6.5314 per dollar on Feb. 5
Just before the start of China's week-long new year break, official data showed a third monthly decline in the country's massive foreign reserves in January as the central bank dumped dollars to defend the yuan and prevent an increase in capital outflows.
On a valuation basis, the benchmark Hong Kong index trades at a multiple of 8 times, its lowest since January 2009, while average valuations on MSCI's Asia-ex Japan index remains around 12, broadly in line with historical averages.
($1 = 7.7893 Hong Kong dollars)
(Editing by Jacqueline Wong)