Hong Kong’s Top Chinese Stocks Drop on Sanction Risk Concerns

(Bloomberg) -- Hong Kong stocks dropped, with investors selling some of the quarter’s top performers on concern more firms may be kicked out of global equity benchmarks and that Chinese banks may be targeted as China-U.S. tensions grow.

The Hang Seng Index retreated as much as 2.2% before paring to end Monday 1.2% lower, with volume 42% higher than the three-month average. The Hang Seng Finance Index dropped 1.6%, with Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. down at least 1.9%. Food delivery services provider Meituan, which is up more than 177% this year and benefited from the pandemic lockdowns, lost 2.2%.

A decision from index provider FTSE Russell to remove eight Chinese companies from its benchmarks helped trigger the selling, according to analysts and traders.

“Worries that MSCI may follow suit to kick out Chinese firms from its indexes prompted some fund managers to take profit in big gainers like banks before the quarterly settlement to avoid that risk,” said Banny Lam, head of research at CEB International Investment Corp.

Bank stocks bore the brunt, amid worries financial institutions could be next to be targeted by the U.S. after President Donald Trump’s order barring American investments in Chinese firms owned or controlled by the military. The U.S. is also preparing to sanction at least a dozen more Chinese officials for their role in recent disqualification of Hong Kong legislators.

“Investors worry that banks may be put on the entity list too,” said Steven Leung, executive director with UOB Kay Hian Hong Kong Ltd. “That has given them an excuse to take profits in financial shares, which jumped in the past month or so.”

Hong Kong’s financials gauge entered a so-called bull market last month after rising more than 20% from an almost four-year low in September. FTSE Russell said more Chinese firms could be removed from its universe, while the Nasdaq and MSCI could release decisions next week, according to the Financial Times.

Investors preoccupied with concerns over trade tensions shrugged off China’s November exports which jumped 21% from a year earlier, beating estimates. The Hang Seng China Enterprises Index declined 1.4% to one-month low. Monday’s slump in Hong Kong stocks also sent their discount to mainland-listed peers to the widest since Oct. 30.

©2020 Bloomberg L.P.

With assistance from Bloomberg