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China policy tightening weighs on HK, Shanghai shares

Published 11/10/2010, 03:44 AM
Updated 11/10/2010, 03:48 AM

* HK, Shanghai markets fall as China tightens policy

* China lifts reserve requirements for some banks by 50 bps

* BoComm, Bank of China targets for RRR hike - sources

* Property issues hit by fundraising, tightening concerns

(Updates to close)

By Vikram S. Subhedar and Farah Master

HONG KONG/SHANGHAI, Nov 10 (Reuters) - Hong Kong and Shanghai stock markets extended this week's retreat on Wednesday on signs that China is tightening monetary policy to curb inflation and mop up some of the speculative money that is flowing into the country.

China increased reserve ratios for some of its biggest banks, sources told Reuters earlier in the day, its third policy move in two days.

On Tuesday, the central bank unexpectedly raised one-year bill yields at an auction and authorities tightened rules for banks participating in currency markets. [ID:nTOE6A807N]

Hong Kong's Hang Seng index <.HSI> fell 0.9 percent and the Shanghai Composite <.SSEC> lost 0.6 percent, with Chinese banks the biggest drag, although both benchmarks recouped some of their earlier losses as investors scooped up laggards.

"Rumours about a rate increase or a rise in reserve requirements were doing the rounds earlier today," said Mark To, head of research at Wing Fung Financial Group in Hong Kong.

"Further tightening is possible and that's going to keep bank shares under pressure and cause some pain for the broader market."

The targets of the latest 0.5 percentage point rise in reserve requirement included Bank of China Ltd <601988.SS> <3988.HK> and Bank of Communications Co Ltd <601328.SS> <3328.HK>, sources told Reuters.

BoComm and Bank of China both closed 2.9 percent lower in Hong Kong and were the top losers among large cap banks.

Chinese banks have put in a strong performance over the past six weeks, leading a market rally, as investor appetite for the sector rebounded on strong lending growth, attractive valuations and sustained strength in the economy.

Traders had already been expecting a pullback in Hong Kong and Shanghai as both indexes looked overbought on a technical basis, leaving them suspectible to profit taking.

INFLATION CONCERNS WEIGH

Analysts said the Shanghai index would likely consolidate for a while before resuming its uptrend. It has surged 17 percent since the start of October.

"Right now, investors' biggest worry is rising inflation," said Ren Chengde, analyst at Galaxy Securities in Shanghai.

China is due to report inflation data for October on Thursday and expectations are consumer prices rose about 4 percent, fanning speculation of another interest rate rise soon. [ID:nTOE6A305I]

"Yes, inflation is severe and there is concern there will be more tightening measures, but the overall uptrend for the market will not change," said Li Wenhui, analyst at Huatai Securities in Nanjing.

In a research report, analysts at Macquarie said "quantitative easing" in the U.S. -- via asset purchases by the Federal Reserve -- would require China to do "quantitative tightening" to counter the impact of inflows.

Reserve rate rises and lending quotas in China should be hot topics for the next few months, said Paul Cavey of Macquarie.

Property counters, another heavily weighted sector in China and Hong Kong, also fell on concern over the prospect of further share sales and lending curbs.

Shanghai's property sub-index <.SSEP> fell 2.8 percent on news of the reserve ratio increase, which could force banks to curb mortgage lending.

In Hong Kong, Sun Hung Kai Properties Ltd <0016.HK> fell 2 percent. Sun Hung Kai shares saw as much as 33 percent of overall turnover shorted on Tuesday on rumours that it could be next to announce a share sale, said traders.

Speculation has been rife since last week that more developers would follow Hang Lung Properties Ltd <0101.HK>, Sino Land Co Ltd <0083.HK> in raising capital via discounted shares sales to take advantage of lofty stock prices.

Evergrande Real Estate Group <3333.HK> shares fell 5.3 percent after the company said late on Tuesday it was raising up to $177 million in a share placement. [ID:nTOE6A807Y] (Editing by Kim Coghill)

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