Hong Kong Stock Selloff Pares Best Quarterly Advance Since 2009

(Bloomberg) -- Hong Kong stocks slumped, trimming the benchmark index’s best quarterly performance in seven years, as concern about the health of Germany’s biggest lender spurred declines in financial companies.

The Hang Seng Index dropped 1.9 percent at the close, paring its gain since the end of June to 12 percent. Bank of East Asia Ltd. led a measure of financial companies lower, sliding 4.1 percent. Property companies fell for a second day, with China Resources Land Ltd. tumbling to a one-month low. A measure of Chinese companies traded in Hong Kong retreated 2.2 percent, while the Shanghai Composite Index climbed 0.2 percent on the last trading day before a week-long holiday.

Deutsche Bank AG shares tumbled as much as 9 percent on Friday after Bloomberg News reported that some hedge funds were moving to reduce their financial exposure to the bank, which has been struggling to convince investors that it has the funds to deal with legal bills tied to past misconduct. The Hang Seng Index has rallied the most in Asia this quarter as inflows swelled via an exchange link with Shanghai and traders scaled back bets for higher U.S. borrowing costs. Mainland markets will be shut all next week for holidays, while the connect is closed until Oct. 11.

Running for Cover

“People fear that, if Deutsche Bank fails, it will bring another global financial crisis," said Francis Lun, chief executive officer of Geo Securities Ltd. in Hong Kong. “There’s a lot of profit taking. People are running for cover on the last day of the third quarter to lock in their profits."

The Hang Seng Index dropped to 23,297.15. The gauge trades at 12.6 times reported earnings, approaching the highest level in five years. Casino operator Sands China Ltd. rose the most in the index this quarter with a more than 29 percent rally, while technology giant Tencent Holdings Ltd. accounted for the largest portion of the measure’s gain.

The Hang Seng China Enterprises Index has gained 10 percent this quarter, while the Shanghai Composite has eked out a 2.6 percent increase. Net buying of Hong Kong shares through a link with Shanghai totaled 58.7 billion yuan ($8.8 billion) this month, compared with purchases of less than 1.75 billion yuan in the other direction.

Manufacturing Gauge

"If there’s no liquidity coming from China, that means the market may weaken a little bit so it may test on the downside," said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. The sell-off triggered by Deutsche Bank concerns is an excuse to take profit, he said. “This is only short-term noise for the market."

A manufacturing index by Caixin Media and Markit Economics rose to 50.1 for September from 50 last month to match analyst estimates. In Hong Kong, retail sales value fell for the 18th month in a row, according to data released after markets closed Friday. The numbers plunged 10.5 percent for August, compared with a Bloomberg survey’s median estimate of a 6.9 percent decline. The city’s pool of yuan deposits shrank to 652.9 billion yuan, the least since February 2013.

The yuan was little changed before it joins the International Monetary Fund’s Special Drawing Rights this Saturday. The SDR, created in 1969, gives IMF member countries who hold it the potential right to obtain any of the currencies in the basket -- currently the dollar, euro, yen and pound -- to meet balance-of-payments needs.

Shenzhen Link

MSCI Inc. said it is continuing to monitor China’s mainland stock market for potential inclusion in its global indexes and has seen some positive developments. The start of a stock trading link between Hong Kong and Shenzhen could help address repatriation issues international investors face, while the number of suspended mainland shares has dropped marginally, the index provider said in a statement Thursday. The China Securities Regulatory Commission said at a briefing Friday that it would issue more rules to support the start of the upcoming Shenzhen connect.

Bank of East Asia retreated 4.1 percent, the most in eight months, while Bank of Communications Co. fell 3.3 percent. Real estate companies extended their drop, with China Resources Land losing 7.5 percent for the week.

China Longyuan Power Group Corp., the nation’s biggest wind farm operator, tumbled 9.1 percent to lead losses on the H-share gauge amid heavy volume. China’s top economic-planning agency will cut renewable-energy tariffs, a report on Escn.com, the website of the China Industrial Association of Power Sources, said on Thursday, citing a government document.

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, Robin Ganguly

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