Hong Kong and China shares fell on Wednesday as disappointing results, this time from consumption-related names, added to investor concerns over mainland corporate profitability that have interrupted this year's rally in the markets.
Consumption on the mainland is a theme that investors have chased as Beijing tries to steer the economy away from investment-led growth, but weak earnings from retailers have prompted a rethink among some.
Mainland Chinese markets were further hit by chatter that a plan allowing individuals in Shanghai and Tianjin to invest abroad has been sent to Beijing for approval, traders said, sparking fears that funds will be drained from the market and demand will be dampened for domestically listed shares.
The Shanghai Composite Index suffered its worst day since last November, slipping 2.7 percent to close below its 100-day moving average, currently seen around 2,348.9, for the first time in more than a month.
The Hang Seng Index lost 0.8 percent, while the China Enterprises Index of the top mainland listings recorded its tenth loss in 11 days, shedding 1 percent -- both paring most of their gains from Tuesday.
Turnover on both the Hong Kong and Shanghai bourses stayed below their respective 20-day averages, although it crept to its highest in five sessions in Shanghai.
People are looking for signs that things are not collapsing in China, said Tan Eng Teck, a Singapore-based investment manager at Treasury Asia Asset Management.
Most have expected bad earnings from the cyclical sectors, so the focus is now on the longer-term structural story, especially with domestic consumption and higher order manufacturing, Tan added.
Of the 49 percent of Chinese companies in the consumer staple sector which have reported 2011 earnings, 69 percent have missed expectations, according to Thomson Reuters StarMine. A similar proportion have missed expectations in the consumer discretionary sector.
On Wednesday, China-focused GOME Electrical Appliances Holdings Ltd tumbled 21.2 percent in volume that was more than seven times its 30-day average, reversing gains for the year and slumping to its lowest since October last year.
Late on Tuesday, GOME posted a 6.2 percent fall in 2011 profit to 1.84 billion yuan ($291 million), lagging analyst forecasts of 2.42 billion yuan and triggering a slew of broker downgrades.
This contrasted with Hengan International Group Co Ltd , China's largest producer of sanitary napkins, which jumped 4.7 percent to HK$76.60, with investors encouraged by its bullish guidance on margins on lower material costs.
This was despite Hengan posting 2011 earnings late on Tuesday that were largely in line with expectations. The company's margins guidance triggered some analyst upgrades including at Barclays, which raised its price target to HK$80 from HK$69.
Hengan is up 5.4 percent this week, an outperformance over the broader market which saw short-selling hit a year-high on Tuesday, with bearish bets accounting for 12.2 percent of total turnover, according to data from the stock exchange.
Short-interest has remained above 11 percent for three successive sessions in Hong Kong, which traders say has happened only twice in the last 12 years, most recently in September last year amid extreme bearishness around China.
FUND RAISING HURT LI & FUNG
The market has not taken kindly in recent sessions to fund raising attempts that substantially diluted the stakes of existing shareholders.
Li & Fung Ltd, supply chain manager for retailers including Wal-Mart Stores Inc and Target Corp, became the latest in a series of companies this month that are taking advantage of this year's rally to raise funds.
Investors had looked favourably on fund raising attempts by Bank of Communications (BoComm) on March 15 via a private share placement that targeted its largest stakeholders and minimized stake dilution.
Investors also took relatively well to China Life Insurance Co Ltd's subordinated debt issue announced earlier this week, a day after the world's biggest life insurer by market value posted its worst-ever quarterly profit slump.
On Wednesday, however, Li & Fung slumped 5.2 percent after announcing plans to raise about $500 million in a share placement priced at a 4-5 percent discount to its Tuesday close.
Li & Fung last week surged to its highest intraday level since April after posting forecast-beating 2011 earnings, but has subsequently pared those gains, trading at HK$18.58, nearing the low end of its share placement price range at HK$18.52.