Analysis | Hong Kong stocks have worst start since ‘95 as mainland woes deepen

This year is looking no kinder to China bulls than 2018. Hong Kong equities suffered their worst first day of trading since 1995, while Chinese stock gauges fell below major support levels, suggesting more losses are on the way.

Traders attributed the slump to Chinese manufacturing data, which signaled a contraction, though yesterday’s plunge just continued the recent bearish trend. The Hang Seng Index slid 2.8 percent, extending 2018’s 14 percent retreat. The Shanghai Composite tumbled to a four-year low, while the Hang Seng China Enterprises Index fell below the key 10,000 level to close at its lowest level since February 2017.

There were few places to hide from the sell-off in Hong Kong. Only two stocks rose on either Hang Seng gauge, with Chinese drugmakers, oil producers, property developers and tech companies taking the biggest drubbing. Cnooc Ltd., the country’s largest offshore oil and gas explorer, alone lost $4.5 billion in value as it fell the most in almost three years.

Of course, one day’s trading doesn’t set the tone for a year. The Hang Seng Index had its best start since 2013 last year, only to later fall into a bear market, while it ended 23 percent higher in 1995 after beginning with a 4.2 percent rout.

Yet traders can’t find much immediate cause for optimism, with the impact of the trade war likely to be increasingly felt on China’s economy over the next few months and the outcome of talks with the U.S. unknowable. Hopes of more stimulus from Beijing may also be unmet, with senior People’s Bank of China officials pushing back against interpretations of its recent moves as signaling significantly looser policy.

“There are a lot of uncertainties lying ahead,” said Banny Lam, head of research at CEB International Investment Corp. “The markets will likely be stuck in a downtrend over the next few weeks.”

There are specific domestic issues plaguing different industries, from a new government pricing system squeezing drugmakers, to concern wild swings in oil prices have wrongfooted producers. Developers, meanwhile, are facing rising funding costs at a time when the sector appears to be heading for a prolonged slowdown. Even the state sector doesn’t offer a haven, with large-cap banks and insurers also tumbling on Wednesday.

Technical factors suggest further declines are due, both in Hong Kong and the mainland. The Hang Seng China Enterprises Index broke out of the trading range it’s been in since June, losing the support of the 10,000 level.

For the Shanghai Composite, 2,500 is seemingly no longer a line in the sand. When in October it dropped below that level, a series of senior officials voiced support for the market, helping the gauge to rebound. On Dec. 25, state-backed funds were seen buying large caps after the index fell to as low as 2,463, helping the measure reclaim 2,500 by the close of trade.

Not so today; the Shanghai Composite ended near its weakest point of the day, at 2,465.91 — the lowest since November 2014, and more than 50 percent below its bubble peak in 2015. Richard Frost, Bloomberg