Asia: Rate Fears Hit Chinese Markets

Fears over interest rate hikes in mainland China due to mounting inflationary and energy costs sent shares tumbling in Shanghai and Hong Kong Wednesday.

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.

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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.