By Gregor Stuart Hunter
Stocks in Hong Kong tumbled after Greeks rejected bailout terms,
while China's shares stabilized amid Beijing's efforts to prop up
markets.
Hong Kong's Hang Seng Index shed 3.2% Monday, its worst one-day
performance since 2012. The index is down 11.3% since its April
high, entering correction territory, defined as a drop of more than
10%. A gauge of Hong Kong-listed Chinese companies, known as
H-shares, is down 3.6%. Hong Kong had largely avoided the
roller-coaster trading that wiped out about $2.4 trillion in value
from Chinese shares during a three-week decline.
"Given the 'No' vote in the Greek referendum and the latest
developments in the mainland A-shares market, there may be
increased volatility in the Hong Kong markets," said the Hong Kong
Monetary Authority in a statement Monday. "The banking system in
Hong Kong is highly liquid and is well equipped to handle any such
volatility. The HKMA stands ready to provide liquidity support to
the banking system should it become necessary to do so."
Investors whisked the most capital out of China via the Stock
Connect than on any day since the trading link between Hong Kong
and Shanghai launched in November. A total of 12.5 billion yuan
($2.01 billion) was withdrawn over the course of the trading
day.
China's indexes also cooled after an initial spike earlier
Monday. The Shanghai Composite ended up 2.4% compared with earlier
gains of as much as 7.8%. The smaller Shenzhen market is down 2.7%
and the ChiNext board, composed of small-cap stocks, is down 4.3%.
All indexes still are off more than a quarter from highs reached in
June.
Chinese officials have turned to an array of tools to prop up
the market in recent days: from encouraging stock buying with
borrowed money to rallying state-affiliated firms to invest. Now,
China's central bank indirectly will help investors borrow to buy
shares and regulators over the weekend also agreed to halt all new
initial public offerings.
"The intervention of [the People's Bank of China] is
unprecedented," said Li Bin, a Shanghai-based analyst at Capital
Securities, and shows "the government is highly concerned about
potential market stampede caused by margin calls." While margin
trading can amplify returns on the upswing, losses can pile up
quickly when investors are forced to sell holdings to pay back
brokerages from whom they have borrowed.
Some say the measures won't have much staying power. "These
policies are aimed at stabilizing market confidence for the
short-term, but still fall short of expectation to push the market
to a higher level," said Jacky Zhang, an analyst at BOC
International. "Investors may remain cautious about long-term
investment."
Other brokerages are more hopeful. Regulators have plenty of
options at hand to stabilize the Chinese market, and the unwinding
of margin positions could encourage more risk taking in the future,
said HSBC.
Regulators are "committed" to preventing further falls in
mainland A-shares, and "more favorable policies are expected to be
rolled out to stabilize the market if volatility remains high,"
analysts from the bank wrote in a research report. "We estimate
that the worst of deleveraging and forced selling in the A-share
market could be behind us."
Moreover, a big source of liquidity hasn't yet been tapped for
stock investments, said analysts at Bernstein Research. Liquidity
from wealth-management products and money-market funds, rather than
bank deposits, drove much of the earlier rally. "This is good news
for the broader market, as the equity market rally has yet to tap
into the largest liquidity pool in the system, i.e. bank deposits,
so future liquidity supply is not yet a constraint," they say.
Late Sunday, the top securities regulator said the People's Bank
of China would "provide liquidity assistance" to China Securities
Finance Corp., a company owned by the stock regulator. The company
will use the money to lend to brokerages, which could then make
loans to investors to buy stocks. It marks the first time
central-bank funds will be directed to institutions other than
banks.
Earlier in the weekend, China's big state-controlled securities
firms, mutual funds and a unit of China's giant sovereign-wealth
fund also pledged to buy shares. The Securities Association said
that 21 brokerages pledged to try to increase investments in the
stock market as long as the Shanghai Composite Index stays below
4,500.
Investors elsewhere in Asia braced for bumpy trading. In
Malaysia, political pressures have helped push the ringgit to its
weakest level against the U.S. dollar since September 1998. The
attorney general said an official investigation into a troubled
state investment fund has uncovered documents related to
allegations that money was transferred into the personal bank
accounts of Prime Minister Najib Razak. The Wall Street Journal
reported on Friday that Malaysian government investigators looking
into the activities of 1Malaysia Development Bhd., or 1MDB, had
traced almost $700 million in deposits into what they believe are
Mr. Najib's personal accounts. Mr. Najib has denied wrongdoing. The
ringgit hit 3.8080 on Monday, and is Asia's worst-performing
currency.
Asian shares also are lower after results of Greece's referendum
Sunday show a victory for the "no" campaign, which rejected
austerity policies set out by the eurozone and the International
Monetary Fund. Creditors have said the outcome imperils future
compromise and puts Greece closer to leaving the currency bloc.
Japan's Nikkei 225 Stock Average shed 2.1% while Australia's
S&P/ASX 200 was down 1.1%. South Korea's Kospi was down
2.2%.
The euro sank 0.6% to $1.1053 against the U.S. dollar and fell
0.8% against the Japanese yen as investors sought safer assets. The
yen also rose 0.2% against the dollar. Gold prices rose 0.2% to
$1,166.20 per troy ounce, while Brent crude futures dropped 1% to
$59.69.
Yifan Xie, Bradford Frischkorn and Grace Zhu contributed to this
article.
Write to Gregor Stuart Hunter at gregor.hunter@wsj.com