China shares tumble, US downgrade accelerates derisking

Hong Kong and China shares retreated for a second-straight session on Monday, pressured by an acceleration of derisking from equity investments following Standard & Poor's downgrade of the long-term credit rating of the United States late on Friday.

Fears of a worsening crisis in Europe exacerbated the prevailing risk-off mood, plunging the Hang Seng Index and Shanghai Composite index to their lowest in more than a year as spooked investors propelled gold to a record on Monday.

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"I think people are very nervous. There's not a lot of confidence right now," said Francis Cheung, managing director of China-Hong Kong strategy at CLSA. "It's strange that whenever there's a crisis, the money goes back to the United States, it doesn't make much sense, but that's how money managers operate."

The Hang Seng Index was down 4.04% at 20,100.2 by the midday trading break, its lowest level in a year. Turnover was almost 20% lower than on Friday, a sign that some investors were sticking to the sidelines.

The benchmark fell below chart support at its August 2010 low of 20,370 shortly after trading started, which analysts said accelerated selling. The next support is seen at the July 2010 low of 19,777.

Cyclicals were the standout underperformers, with the Hang Seng Composite Index for Materials poised for a second straight decline of more than 5%. China Coal Energy Co Ltd was down 6% with turnover reaching its 30-day average by midday.

In a note to clients on Monday, CICC closed its technical long call initiated on June 20 that advised clients to ride on a rebound in China equities, warning now of rising tail risk with the credit default swap spreads for Italy and Spain surging, suggesting that the crisis is spreading.

OIL NAMES DRAG SHANGHAI LOWER

Large cap oil counters led the Shanghai Composite Index down 3.68% to 2,529.88, its lowest since August last year, as A-share turnover surged to the highest in a month, at 71.3 billion yuan (USD 11,07 billion).

PetroChina Co Ltd's 2.36% decline was the top drag on the benchmark. It also plunged the stock deeper into oversold territory on the charts, leaving it barely 2% above lows last seen at the height of the 2008 financial crisis.

"The S&P downgrade added pressure to an already weak market in Shanghai," said Qian Qimin, deputy head of research at Shenyin & Wanguo Securities in Shanghai. "While it is in line with global markets, the fall should be short-lived and is likely to last only one or two days. A strong rebound, however, is not expected immediately amid weak investor confidence."

Traders said the decline in China stocks was not driven by Beijing's scheduled release of July CPI data on Tuesday.

Market players predicted July inflation would remain above 6%, but investors expected a weak global market could slow the pace of interest rate increases by the Chinese central bank, which could boost the stock market, traders said. (USD 1 = 6.440 yuan).