Shanghai, HK shares fall as China tightening fears linger

HONG KONG/SHANGHAI: Shanghai and Hong Kong stocks fell at midday on Wednesday, as investors sold off on worries China may raise interest rates as early as this week and adopt other measures to curb inflation.

Chinese Premier Wen Jiabao has said Beijing is preparing steps to tame price increases, while the central bank chief said the government will impose price ceilings on food items and crack down on speculation on agricultural commodities.

Rising costs has prompted McDonald's Corp to raise its menu prices in China.

"China wants to send a message to everybody that this time they are serious in fighting inflation, reducing excess liquidity and controlling speculative inflows," said Danny Yan, who helps manage more than $400 million at Tai Fook Asset Management.

The consolidation in Hong Kong and China may last until year-end as fears about a possible reduction in the size of US quantitative easing or QE2, in addition to inflation worries in the mainland, will keep investors away from stocks, the Hong Kong-based Yan said.

"The concerns won't fade out unless there is a moderation in inflation. So every month, every weekend, the market will be jittery about any tightening measure in China," Yan added.

The benchmark Hang Seng Index fell 0.7 per cent to 23,532.94, the lowest in more than two weeks.

Food counters fell. Meat processor and distributor China Yurun Food Group dropped 1.6 per cent, instant noodle maker Tingyi Holdings lost 2.3 per cent, and dairy products producer Mengnui Dairy shed 1.4 per cent.

China Foods, a distributor of retail packaged cooking oil and other consumer food items, slumped 5.6 per cent.

Energy counters and other commodities dropped on concerns China's efforts to fight inflation may slow growth, cutting demand for coal, metals and oil.

China Shenhua Energy Co fell 1.5 per cent and Aluminum Corp of China declined 1.4 per cent. PetroChina was down 1.9 per cent.

Utilities such as mobile phones held up amid the sell-off as they would be spared from China's tighter monetary policy, Yan said. China Unicom rose 0.8 per cent.

China's key stock index slipped 1.2 per cent to 2,860.9 in thin volume, as retail investors dumped large resource issues such as Sinopec Corp.

The index has dropped 9 per cent since Friday's slump, with retail investors, who make up more than two-thirds of turnover, selling on the slightest hint of measures to cool the country's buoyant economy.

Analysts said the short-term downtrend was likely to continue after the index breached the 250-day moving average, now at 2,891.2 points, considered a key level in the domestic market, but periodic mild rebounds were still likely.

The inability of the index to break above the area of 3,181 points last Thursday has turned the technical picture quite bearish for the Shanghai Composite Index.

"On the domestic economic front, the move to control rising prices is attacking non-ferrous metals and miners," said Cheng Yi, analyst at Xiangcai Securities in Shanghai.

Cheng added that foreign factors such as risks from Europe and a stronger dollar, which have caused a slump in prices of large commodities, were also having a big impact on the market.