U.S. Stock Rout Infects Hong Kong, Mainland

* Stocks on several Chinese exchanges dropped sharply in the wake of major falls on Wall Street

*Experts said that while downward pressure is likely to continue, the effect on China may be limited due to its relative separation from the global financial system

(Beijing) — Stocks in Hong Kong and on China’s Nasdaq-style enterprise board saw their worst single-day drop in more than two years on Tuesday, both tumbling by more than 5%, following an earlier major rout on Wall Street. Shares on China’s two main boards also fell sharply, posting their biggest drops in more than a year.

“The sudden plunge of U.S. stocks will inevitably cause a spill-over effect on global markets, as investors worldwide are looking for safer assets,” said Ethan Wang, head of investment strategy at Standard Chartered China.

Hong Kong’s benchmark Hang Seng Index fell by 5.12% on Tuesday, its largest drop since China’s stock market rout in the summer of 2015 and erasing nearly all gains since the beginning of the year. China’s Nasdaq-style ChiNext Index finished down by a similar 5.34%, its largest single day drop since January 2015. The Shanghai Composite and Shenzhen Component indexes closed down 3.35% and 4.23%, respectively.

The big declines came after the Dow Jones Industrial average fell by 4.60%, or 1,175.21 points on Monday, the largest single-day point drop in its history and the largest percentage drop in more than six years. The S&P 500 Index and Nasdaq fell 4.10% and 3.78%, respectively.

The sell-off in U.S. equities began Friday with the release of stronger-than-expected employment and wage data, creating expectation of an interest rate hike. Analysts have been expecting a correction in U.S. stock markets after a nearly decade-long bull run following the global financial crisis.

Analysts said the downward pressure is likely to continue, especially on Hong Kong stocks that are more intricately linked with the global financial system. Hong Kong’s benchmark Hang Seng Index rose to an all-time high just two weeks ago, and was the world’s best performing major index last year.

“The Hong Kong stock market is likely to be under some pressure in the short term as the Hong Kong market has risen too high too fast since the beginning of 2018 and as global investors’ risk appetites expanded significantly amid the sharp decline in the U.S. stock market,” Bank of China’s investment banking group wrote in a research note on Tuesday.

In China, market sentiment has been weak since last week in the wake of unexpected shortfalls in earnings forecasts from small companies, and sell-offs triggered by margin calls on small caps. The bearish sentiment was further exacerbated by fresh expectations of tighter regulation of high-leverage investment bets on stocks, sending the Shanghai gauge down by 2.7% last week, its worst weekly performance in more than a year.

Still, the impact of any global correction could be more muted in China due to its relative separation from the global financial system, said Standard Chartered’s Wang. But he added that selling of mainland shares held by offshore investors could put pressure on blue chips that such investors tend to favor. That could be exacerbated by similar blue-chip selling by mainland institutional investors, he added.

Mainland shares will be under short-term pressure if the U.S. market panic persists and funds flow to the bond market for safety, said Liu Dongliang, an analyst with China Merchants Bank, in a Tuesday report. Another uncertain element is whether China may take actions to try and support the market in the case of a major sell-off, something it has done in the past.

“The mainland market will switch back to strong shares and weak bonds once the plunge of U.S. shares is confirmed to be short-termed and sentiment is restored,” Liu said.

Contact reporter Liu Xiao (liuxiao@caixin.com) and Leng Cheng (chengleng@caixin.com)