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Asia: Rate Fears Hit Chinese Markets

Daniel M. Harrison

The Shanghai Composite Index plunged 154 points, or 4.1%, to 3579.15, while Hong Kong's Hang Seng tumbled 652 points, or 2.5%, to 25,610.22. In Japan, the Nikkei ended 53 points, or 0.4% higher, at 14,102.48, after losing around 100 points from earlier in the session.

"Short sell turnover is now at 6.24% of market turnover, with the Hang Seng continuing to test the upper level of 26,300 points today," says Benson Li, a trader at Daiwa Securities SMB in Hong Kong. "The trade band is getting narrower: any good or bad news may trigger conviction in either direction."

The selloff surprised some dealers, who predicted before market open that a rally in the Hang Seng might ensue, with the index reaching above 27,000 points. Some reported that they were covering short positions in Hong Kong Exchanges -- a proxy for the Hang Seng -- which fell 3.6%, to HK$159.50.

While selling was particularly concentrated in major large blue-chip petrochemical companies such as PetroChinaPTR, investors were also unloading shares in what many are saying are overvalued momentum plays such as China MobileCHL and interest-rate sensitive property developers such as Hang Lung PropertiesHLPPY. China Mobile declined 2.8%, to HK$132.50, and Hang Lung fell 5.1%, to HK$31.

As crude oil remained steady at $121.71 a barrel in Singapore trading, PetroChina lost 5.5%, to HK$11.46, while China Shenhua EnergyCUAEF fell 2.7%, to HK$34.95. Higher energy costs hurt downstream energy suppliers, who are forced to pass price hikes on to customers, or in the case of Chinese companies, subsidize the costs themselves. PetroChina is both an upstream and downstream operator.

Insurance companies also faltered, since they do not tend to do well in times of inflationary pressure, as investors fear that lower consumer spending will diminish future sales. China Life InsuranceLFC, the nation's largest insurer, dropped 3.7%, to HK$33.95.

Holding up better than most shares was e-commerce giant Alibaba.comALBCF, which fell 2.6%, to HK$15, after reaching a high of HK$16.16 earlier in the day. Many expected a failed deal between majority shareholder Yahoo!YHOO and MicrosoftMSFT to send shares back to around HK$13, the level that they were at prior to a speculative rally in the stock. Better than expected quarterly results have so far helped the stock remain strong, however.

Goldminers were mixed, as some investors were taking profits after a recent surge in the shares on an increase in the base commodity. The metal was selling for $875.20 an ounce in Singapore, after reaching a high of $881.05 an ounce earlier.

Zijin MiningZIJMF dove 3.4%, to HK$7.20, and Zhaojin MiningZHAOF was 3% lower, at HK$12.16. Sino GoldSIOGF bucked the day's bearish trend, surging 5.7%, to HK$40.70.

In Japan, the yen was weakening vs. the dollar, to 105.33 vs. 104.70 earlier. Exporters rose, since many price the margin between profitability and loss on U.S. sales at 105 yen vs. the dollar. NintendoNTDOY surged 2.3%, to 58,100 yen, and SonySNE added 0.6%, to 4950 yen. CanonCAJ was 1.3% higher, at 5470 yen.

In Japan, a return to heavy buying in financials helped the Nikkei settle at a 4-month high, despite some slackening in the gains toward the afternoon. Mizuho FinancialMFG jumped 2.8%, to 554,000 yen, and Mitsubishi UFJMTU gained 2.6%, to 1160 yen.

Elsewhere in Asia, markets were mixed. Taiwan's Taiex rose 0.8%, to 8926.34, and South Korea's Kospi finished 0.3% lower, at 1854.01. In India, the Bombay Sensitive Index lost 0.2%, to 17,339.31.

Be sure to check out the Far East Portfolio at Stockpickr.com to find out which Indian and Chinese companies are making big moves and announcing major news.