Hong Kong stocks on Thursday recorded their worst day in four months, after Goldman Sachs downgraded major Chinese banks on local government debt risks and the US Federal Reserve gave a hawkish outlook.
The Hang Seng
(HSI) Index ended down 3%, its biggest daily drop since early March. The benchmark is the leading decliner in the Asia Pacific.
Financial shares led the sell-off, after Goldman Sachs downgraded several Chinese banks.
The Hang Seng Mainland Banks Index, which tracks mainland Chinese banks listed in Hong Kong, plummeted 6.5%. It was the steepest daily decline since February 2018.
In a lengthy report on China’s banking sector this week, Goldman Sachs cut the Industrial and Commerical Bank of China and Industrial Bank from “buy” to “sell,” while downgrading the Agricultural Bank of China from “neutral” to “sell.”
It also gave a “sell” rating to the Bank of Communications and Huaxia Bank.
These banks face earnings risks stemming from their exposure to China’s local government debt, the Wall Street firm said.
Other analysts estimate China’s outstanding government debts surpassed 123 trillion yuan ($18 trillion) last year, of which nearly $10 trillion is so-called “hidden debt” owed by risky local government financing platforms.
Chinese leader Xi Jinping’s zero-Covid campaign has exhausted the budgets of many regional governments, after they spent billions of dollars on frequent Covid lockdowns, mass testing and quarantine centers before last December’s policy U-turn.
Sentiment in Hong Kong markets was also affected by the Fed’s hawkish rate outlook.
Minutes showed Wednesday that Fed officials expect more rate hikes to come this year as inflation remains “unacceptably high.”
“Presuming the upcoming employment and CPI reports continue …, we reckon the odds of a rate hike on July 26 have increased,” said Stephen Innes, managing partner of SPI Asset Management.
Persistent geopolitical tensions, ongoing concerns about US-China decoupling and China’s internal growth challenges continue to support pessimistic arguments about the country’s risk markets, he added.
US Treasury Secretary Janet Yellen will arrive in Beijing on Thursday afternoon, as part of the Biden administration’s ongoing efforts to mend the fraught relationship with Beijing.
Elsewhere in the region, Japan’s Nikkei 225
(N225) fell 1.7%. South Korea’s Kospi lost 0.9%. And China’s Shanghai Composite shed 0.5%.
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