528-point drop follows hike in US emergency-loan discount rate

HONG KONG: Hong Kong stocks fell the most in two weeks, after the US Federal Reserve raised its discount rate for the first time in more than three years, heightening concern stimulus programs are winding down.

The Hang Seng Index fell 528 points, or 2.6 percent, to close at 19,894.02, its biggest fall since February 5. It was also the worst performer in Asia. This extended the gauge's losses this week to 1.9 percent.

"The market is overreacting to the news," said Michiya Tomita, who helps manage $65 billion at Mitsubishi UFJ Asset Management Co in Hong Kong, who added that "there are also fewer market participants this week, because of the Chinese New Year."

The Hang Seng China Enterprises Index, which tracks the so-called H-shares of Hong Kong-listed mainland companies, slipped 2.9 percent to 11,263.83.

The central bank on February 12 ordered mainland lenders to increase their reserve requirement for the second time in a month.

Shares on the Hang Seng Index were priced at an average 12.9 times estimated earnings, down from 18.1 times on November 16 when the index closed at its highest level for 2009. Concerns over monetary tightening on the mainland dragged down the shares of its biggest lenders and have contributed to a 13 percent drop in the stock benchmark since the November high.

Esprit slid 4.7 percent to HK$54.30. Li & Fung lost 3.6 percent to close at HK$35.10, after the world's largest retailer Wal-Mart Stores Inc reported fourth-quarter sales that trailed its projection and predicted a "challenging" first quarter for US stores.

After US markets closed, the Federal Reserve Board raised the discount rate charged to banks for direct emergency loans by a quarter point to 0.75 percent, effective February 19. It said the changes are intended to encourage financial institutions to rely more on money markets rather than the central bank for short-term financing.

Bank of Communications, China's fourth largest bank, dropped 3.8 percent to HK$7.69. Bank of China Ltd, the No 3, slid 2.9 percent to HK$3.71. Industrial and Commercial Bank of China Ltd, the world's largest bank by market capitalization, declined 3 percent to HK$5.48. China Construction Bank Ltd, the country's second-biggest lender, slid 2.9 percent to HK$5.77.

The Hang Seng Finance Index fell 2.3 percent to 30,303.32.

Ruinian International Ltd, the health-related products manufacturer, fell 7.7 percent to HK$2.77 on its debut.

Standard Chartered Plc retreated 1.7 percent to HK$176.80, after CLSA Ltd said the international banking group will underperform HSBC Holdings Plc due to heightened concerns about indebtedness and job loss in the United Arab Emirates. HSBC, Europe's biggest bank, slid 1.8 percent to HK$81.05.

One stock gained and 41 shares dropped among the 42 members in the Hang Seng Index. Hang Seng Index futures slid 2.1 percent to 19,912.

Bloomberg News

(HK Edition 02/20/2010 page2)