Hong Kong stocks slide

On Thursday, Hong Kong stocks experienced their worst day in four months as a result of major Chinese banks being downgraded by Goldman Sachs due to risks associated with local government debt, coupled with a hawkish outlook from the US Federal Reserve.

The Hang Seng (HSI) Index concluded the day with a 3% decline, marking its largest daily drop since early March and positioning it as the leading decliner in the Asia Pacific region.

Financial shares took the brunt of the sell-off following Goldman Sachs’ downgrade of several Chinese banks.

The Hang Seng Mainland Banks Index, which tracks mainland Chinese banks listed in Hong Kong, experienced a substantial 6.5% plunge, representing the sharpest daily decline since February 2018.

Goldman Sachs’ extensive report on China’s banking sector prompted the downgrades, with the Industrial and Commercial Bank of China and Industrial Bank being downgraded from “buy” to “sell,” and the Agricultural Bank of China downgraded from “neutral” to “sell.” Additionally, the Bank of Communications and Huaxia Bank received a “sell” rating.

The Wall Street firm highlighted that these banks face earnings risks due to their exposure to local government debt in China.

According to other analysts, China’s outstanding government debts surpassed 123 trillion yuan ($18 trillion) last year, with nearly $10 trillion classified as “hidden debt” owed by risky local government financing platforms.

The zero-Covid campaign led by Chinese leader Xi Jinping has strained the budgets of many regional governments. They spent billions of dollars on frequent Covid lockdowns, mass testing, and quarantine centres before a policy reversal in December 2022.

The market sentiment in Hong Kong was further influenced by the Federal Reserve’s hawkish stance on interest rates.

Minutes released on Wednesday indicated that Fed officials anticipate further rate hikes this year, citing persistently high inflation levels as “unacceptably high.”

Stephen Innes, managing partner of SPI Asset Management, commented, “Presuming the upcoming employment and CPI reports continue…, we reckon the odds of a rate hike on July 26 have increased.”

Ongoing geopolitical tensions, concerns surrounding US-China decoupling, and internal growth challenges in China have contributed to a pessimistic outlook on the country’s risk markets, Innes added.

US Treasury Secretary Janet Yellen is set to arrive in Beijing on Thursday afternoon as part of the Biden administration’s ongoing efforts to mend the strained relationship with China.

Elsewhere in the region, Japan’s Nikkei 225 (N225) declined by 1.7%, South Korea’s Kospi lost 0.9%, and China’s Shanghai Composite dropped 0.5%.

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