Hong Kong Stocks Falter on Concerns Over Chinese Banks

On Thursday, Hong Kong stocks experienced their most significant decline in four months following Goldman Sachs' downgrade of major Chinese banks due to local government debt risks and the US Federal Reserve's hawkish outlook.

The Hang Seng (HSI) Index concluded the day with a 3% drop, marking its largest daily decrease since early March. The Hang Seng Mainland Banks Index, which monitors mainland Chinese banks listed in Hong Kong, experienced a steep decline of 6.5%. This represents the most substantial daily drop since February 2018.

In other parts of the region, Japan's Nikkei 225 (N225) fell by 1.7%, while South Korea's Kospi lost 0.9%. China's Shanghai Composite also shed 0.5%.

Goldman Sachs lowered its ratings for the Industrial and Commercial Bank of China and Industrial Bank from "buy" to "sell." It downgraded the Agricultural Bank of China from "neutral" to "sell." The Bank of Communications and Huaxia Bank received a "sell" rating.

These banks face potential earnings risks due to their exposure to local government debt in China. The country's zero-Covid campaign has depleted the budgets of various regional governments, which expended substantial amounts on frequent Covid lockdowns, widespread testing, and quarantine centersprior to a policy shift in December of last year.

Market sentiment was also influenced by the Fed's hawkish stance on interest rates. Fed officials anticipate further rate hikes this year due to persistently "unacceptably high" inflation.

Ongoing geopolitical tensions, concerns regarding the decoupling of the US and China, and China's internal growth challenges continue to fuel pessimistic arguments about the country's risk markets.