Chinese stocks in Hong Kong extended the biggest sell-off in Asia this year on concern the nation's deepening economic slowdown will sap corporate earnings. The offshore yuan weakened to a five-year low and bonds fell. The Hang Seng China Enterprises Index slid 1.3 percent at the close, completing a third day of losses. China Life Insurance Co. and GF Securities Co. led declines by financial stocks. The Shanghai Composite Index closed 0.3 percent higher. The offshore yuan depreciated 0.4 percent after earlier falling to 6.6094, the weakest level since December 2010. China's 10-year bonds dropped the most in two weeks. The Hang Seng China gauge has decoupled from mainland equities this year for the first time in a decade as the government intervened to support shares in Shanghai and Shenzhen and foreign investors turned bearish on the nation's earnings prospects. While the index of Chinese stocks in Hong Kong has fallen 19 percent in 2015, the most among Asian benchmark indexes tracked by Bloomberg, the Shanghai Composite Index has climbed 10 percent. "The China market is likely to remain volatile in the first half as growth will slow further and the yuan is expected to weaken," said William Wong, head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. "H shares are vulnerable as more U.S. rate hikes will affect the economy in Hong Kong as well as market sentiment." Investors have been driven away from Chinese shares in Hong Kong by weak economic growth, surging volatility in mainland equities and an anti-graft campaign that led to the disappearance or arrest of some of the nation's most high-profile corporate executives. A weaker yuan also cuts the value of corporate earnings by H shares, which are priced in Hong Kong dollars. The Hang Seng gauge trades at 7.2 times reported earnings, the biggest discount to the MSCI All-Country World Index since 2003, according to data compiled by Bloomberg. The CSI 300 index rose 0.1 percent as telecom and technology companies advanced, offsetting losses in financial and utilities stocks. ZTE Corp. rallied 1.9 percent, rising for a second day, while SDIC Power Holdings Co. slid 1.2 percent. While H shares extend an annual tumble, a degree of normalcy has returned to mainland equity markets. A gauge of 50-day price swings has fallen to the lowest level in seven months, while the Shanghai Composite is poised for the best performance among major global indexes this quarter. Regulators have removed some support measures implemented at the height of a $5 trillion rout, while a ban on selling by major shareholders is due to expire next week. The People's Bank of China has tolerated a 1.4 percent drop in the onshore currency this month, after propping up the exchange rate in the weeks leading up to the International Monetary Fund's Nov. 30 decision to grant the yuan reserve status. The monetary authority has become more hands-off of late and allowed a "significant depreciation" in December, Malayan Banking Bhd. strategists led by Saktiandi Supaat wrote in a note dated Tuesday. Debt Yields The yield on sovereign bonds due October 2025 climbed three basis points to 2.85 percent, after the central bank's chief economist damped speculation lenders' reserve-requirement ratios will be eased by saying any adjustments should avoid causing too much volatility to short-term rates. The benchmark 10-year yield sank to 2.80 percent this week, the lowest since January 2009, ChinaBond data show. The nation's manufacturing sector probably contracted for a fifth straight month in December, according to the median forecast of analysts in a Bloomberg survey. The official purchasing managers index is due to be released by the National Bureau of Statistics on Jan. 1. Gross domestic product growth will slow from an estimated 6.9 percent this year to 6.5 percent next year, according to a separate Bloomberg survey. In Hong Kong, Sinotrans Shipping Ltd. jumped 2.7 percent after the State Council approved a strategic restructuring of China Merchants Group and Sinotrans & CSC Holdings Co. The move, which comes after State-Owned Assets Supervision & Administration Commission agreed on a reorganization of China Ocean Shipping Group Co. and China Shipping Group Co., is part of a push to streamline the state-owned enterprises sector. Source: Bloomberg
