Equity market under great pressure ahead of worries about slowing mainland economy and capital outflows

The Hong Kong stock market continued its loss on Wednesday under the specter of the devaluation of the mainland currency.

Stock analysts said that the weakening renminbi could trigger an outflow of capital that would hurt the property market, while there is increased concern that the nation's economic slowdown is deepening.

On Wednesday, the People's Bank of China cut the renminbi's reference rate by another 1.6 percent after the 1.9 percent reduction the day before.

Further devaluation of the renminbi reflects the central government's struggle to maintain the momentum of economic growth, said Lim Say Boon, chief investment officer at DBS Bank.

Kingston Lin King-ham, general manager of AMTD Asset Management Ltd, said: "The renminbi devaluation is widely taken as a sign that shows the economy is worsening."

Hong Kong and mainland equity markets will be under great pressure if markets reach a consensus that the world's second largest economy is growing more slowly.

Hong Kong's benchmark Hang Seng Index slumped 2.38 percent to close 23,916.02 on Wednesday and the Shanghai Composite Index dropped 1.06 percent to 3,886.32.

Airline stocks took a beating for the second day in Hong Kong. Some analysts downgraded the sector, citing that the renminbi depreciation would greatly raise the cost of servicing foreign debt.

Hong Kong-listed H shares of Air China dropped 5.8 percent to HK$6.99 following a 12.8-percent plunge the day before. China Southern Airlines slumped 7 percent to HK$6.29.

Credit Suisse cautioned investors against the risks of more capital outflows and singled out the property sector as the biggest loser. China Overseas Land and Investment Ltd slid 8.3 percent to HK$23.5, while China Resources Land Ltd declined 8 percent to HK$19.78.

The slump in the property and airline sectors could drag the Hang Seng Index down to 23,000 in the coming months, about 3.8 percent lower than its Wednesday's close, said Lin.

Devaluation not only hurt the companies which have large foreign currency payment commitments, but also those that are heavily dependent on exports as the mainland's slower economic growth will hit foreign import capability in some extent, Lin said. The shares of Man Hua Holdings Ltd, an exporter of sofas, dropped 2 percent to HK$7.82 on Wednesday.

"The depreciation of the renminbi so far is not large enough to help boost the nation's export growth," Lin said. He expects only a 10-percent depreciation will be effective rather than recent 3 percent drop.

celia@chinadailyhk.com

The slump in the property and airline sectors, triggered by the devaluation of the renminbi, could drag the Hang Seng Index down to 23,000 in the coming months, about 3.8 percent lower than its Wednesday close, analysts warn. Parker Zheng / China Daily

(HK Edition 08/13/2015 page7)