The longest winning streak in nine years for Chinese stocks traded in Hong Kong is in jeopardy of coming to an end, done in by a decline in the shares of financial companies such as China Minsheng Banking Corp.
For the first time since May 26, the benchmark Hang Seng China Enterprises Index is down, falling 1.5 percent as trading resumed after a holiday in Hong Kong. The gauge rose 5.9 percent during the nine-day rally, making it the world’s best-performing equity benchmark over the period after gauges in Ukraine and Argentina. Next week, MSCI Inc. will decide whether to include mainland A shares in its international indexes.
“A correction is now overdue,” said Daniel So, a strategist at CMB International Securities Ltd. “If MSCI does announce A share inclusion, that would of course help A shares at least in the short term, but that’s not a positive factor for Hong Kong. If anything, there would be more competition from A shares.”
Investors were hesitant to keep pushing up prices even though data released on Thursday showed deflationary pressures in China’s industries eased further in May, while consumer price gains were subdued enough to offer the central bank scope for more stimulus if needed.
The Hang Seng China Enterprises Index traded at 8,889.02 as of 1:11 p.m. in Hong Kong, with all but four stocks retreating on the 40-member gauge. Minsheng Banking headed for its first decline in six days, to pace a drop by financial companies. China Merchants Bank Co. slid 3.4 percent. The Hang Seng Index fell 0.7 percent, poised for its first back-to-back losses since May 19.
Stock Valuations
Mainland Chinese markets will reopen on Monday, when May data for industrial output and retail sales are due. Reports on money supply and new loans may be released as early as Friday.
The rally came after a bruising year for the gauge of Chinese stocks traded in Hong Kong, with the benchmark still down 8 percent this year. The index’s price-earnings ratio fell to 5.7 in February, the lowest since at least 2001, according to data compiled by Bloomberg. While the measure now trades at 7 times reported earnings, that’s about a third of the MSCI All-Country World Index’s multiple of 20.
The speed of the advance sent an index measuring the relative strength of the Hang Seng China Enterprises Index to 69.9 on Wednesday, the highest level since April 2015. Readings of 70 or higher indicate that asset prices have risen too far, too fast and that a reversal may be imminent.
MSCI Decision
MSCI is scheduled to unveil on June 14 its decision on whether to add mainland-traded Chinese stocks to its global indexes. The odds of being included have increased to 70 percent from 50 percent with the government’s efforts to curb trading halts and clarify beneficial ownership rules, Goldman Sachs Group Inc. said last month.
“We are approaching judgment day for A shares on MSCI inclusion, so people are probably locking in some profits ahead of the announcement,” Alex Wong, who helps oversee about $100 million at Ample Capital Ltd.
To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Phani Varahabhotla
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