China shares slump most in seven months

Hong Kong - Chinese stocks in Hong Kong slumped the most in seven months, led by financial companies, as rising bets the Federal Reserve will raise borrowing costs this year derailed one of the world’s best rallies.

The Hang Seng China Enterprises Index tumbled 4% at the close, its biggest loss since February 11. The gauge rose 34% from a February low through Friday, sending a momentum indicator to the highest level since April 2015.

China Life Insurance and China Construction Bank fell more than 5%. The Shanghai Composite Index slid 1.9% at the close, nearing the 3 000 level that has triggered state support in the past.

Federal Reserve Bank of Boston President Eric Rosengren warned on Friday that waiting too long to raise interest rates could overheat the US economy, a day after European Central Bank President Mario Draghi surprised markets by playing down the prospect of further stimulus.

Speculation that the Fed will move slowly in raising US borrowing costs has helped rank Hong Kong equities among the world’s best performers this quarter as the city’s currency is pegged to the dollar.

“Investors are worried the US will hike rates,” said Daniel So, a strategist at CMB International Securities in Hong Kong.

“In the past few months, Hong Kong has outperformed most markets because of speculation central banks will continue to ease or low US rates will continue, so it’s especially sensitive to rate hike concerns.”

Northbound Selling

The Hang Seng China Enterprises gauge fell to 9 654.08. A measure of its 14-day relative strength index was at 77.2 on Friday, above the threshold of 70 that indicates overbought conditions to some traders. The benchmark Hang Seng Index tumbled 3.4% from a one-year high, with a gauge of its expected price swings surging the most since January.

Net buying of Hong Kong equities through an exchange link with Shanghai reached the highest since April 2015 on Friday amid a flood of Chinese money flowing across the border. Global investors sold a net 2.2 billion yuan of mainland stocks through the link on Monday, the most since November.

The Shanghai Composite capped its biggest drop in six weeks, with nearly 12 shares falling on the gauge for each that rose. China’s benchmark equity index went the past 19 sessions without a 1% closing move in either direction. The Shenzhen Composite Index retreated 2.9%, while the ChiNext index of small-company shares lost 2.6%.

Insurers retreat

China Life, which jumped 13% last week, dropped 5.6% in Hong Kong to pace insurers lower, while China Construction Bank slid 5.4%. Tencent, the biggest gainer on the Hang Seng Index over the past month, sank 3.2%. AAC Technologies was the day’s biggest decliner on the Hang Seng Index as it tumbled 8.4%, paring its 2016 advance to 57%.

Insurers had rallied last week after mainland regulators allowed them to invest in the city’s equities through an exchange trading link with Shanghai. The companies are allowed to invest up to 15% of their assets in overseas markets including Hong Kong, which they can currently do through a different program.

A measure of Hong Kong developers declined the most since January as China Resources Land slumped 5.9% from a one-year high and Hang Lung Properties traded without the rights to a dividend.

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