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Asian stocks’ early gains eroded Monday, led by declines in Hong Kong and mainland China over worries about the Hong Kong dollar.
The currency last week weakened to the bottom of its trading band against the U.S. dollar, leading Hong Kong’s monetary authority to try to bolster it by selling $1.23 billion in U.S. dollars to buy Hong Kong dollars.
The Hang Seng Index ended down 1.6%, while the Shanghai Composite Index lost 1.5%.
“This is mainly a liquidity-driven decline” as some funds leave Hong Kong, said William Lo, chief investment officer at Infinitus Partners Asset Management. The firm has been underweighting Hong Kong stocks, expecting rising interest rates to increase local companies’ borrowing costs.
Local interest rates are rising: Hong Kong’s one-month interbank lending rate, or Hibor, jumped back to 1% on Monday from 0.85% on Friday. On a sustained basis, Lo said property developers would be hardest hit while lenders would be the major beneficiary.
Banks, though, were among the big decliners Monday, with China Construction Bank falling 2.3% and Industrial & Commercial Bank of China losing 2.4%.
As for mainland shares, DBS strategist Ivan Li said recent soft data from China — including Friday’s news of a surprise trade deficit for March — have cast a shadow over the outlook for the world’s second largest economy. That has some investors on the sideline ahead of Tuesday’s release of first-quarter China economic growth and March business activity, he added.
Also on tap this week are more earnings out of the U.S. and speeches by Federal Reserve officials.
Asian stocks generally started higher Monday, but by the close the only major indexes in positive territory were in Australia, South Korea and Japan. Australia’s S&P/ASX 200 gained 0.2%, while South Korea’s Kospi index ended up 0.1% and Japan’s Nikkei 225 index rose 0.3%.