Hong Kong Stocks Slump on Worries About Chinese Banks, US Interest Rates

Hong Kong stocks suffered their worst day in four months on Thursday, with the Hang Seng (HSI) Index dropping 3%, the largest decline since March, as a result of Goldman Sachs downgrading major Chinese banks due to local government debt risks and the US Federal Reserve’s hawkish outlook.

Financial shares led the sell-off after Goldman Sachs downgraded several Chinese banks, causing the Hang Seng Mainland Banks Index to plummet by 6.5%, the sharpest daily decline since February 2018.

Goldman Sachs downgraded the Industrial and Commercial Bank of China and Industrial Bank from “buy” to “sell,” while also downgrading the Agricultural Bank of China from “neutral” to “sell,” and giving a “sell” rating to the Bank of Communications and Huaxia Bank, citing earnings risks stemming from their exposure to China’s local government debt.

Analysts estimate that China’s outstanding government debts exceeded 123 trillion yuan ($18 trillion) last year, with nearly $10 trillion considered “hidden debt” owed by risky local government financing platforms.

The zero-Covid campaign led by Chinese leader Xi Jinping has put a strain on the budgets of many regional governments, depleting their funds after substantial spending on Covid-related measures, leading to concerns about the country’s local government debt.

Sentiment in Hong Kong markets was also influenced by the Federal Reserve’s hawkish rate outlook, as minutes revealed that Fed officials anticipate further rate hikes this year due to persistently high inflation.

Amid persistent geopolitical tensions and concerns about US-China decoupling, pessimistic views on China’s risk markets continue to be supported by ongoing internal growth challenges.

US Treasury Secretary Janet Yellen’s visit to Beijing on Thursday afternoon is part of the Biden administration’s efforts to improve the strained relationship with China.

In other markets, Japan’s Nikkei 225 fell 1.7%, South Korea’s Kospi dropped 0.9%, and China’s Shanghai Composite shed 0.5%.