China stocks kicked off the mid-year earnings season on a cautious note on Monday, as optimism about companies' interim results was offset by concerns of economic slowdown in the second half and lingering fears of monetary tightening.
But Hong Kong stocks started July trading higher, as financials - the biggest beneficiary of the newly-launched “Bond Connect” with China - rose while small- and mid-caps gained on the back of new Beijing rules letting insurers buy Hong Kong shares via the Shenzhen Connect.
At the lunch break, China's blue-chip CSI300 index was down 0.4 per cent, to 3,653.43 points, while the Shanghai Composite Index was unchanged at 3,193.72 points.
The market has largely priced in an upbeat earnings season, which starts on Monday.
As of June 29, 1,210 Chinese “A-share” firms had issued guidance for interim results for 2017, and 72 per cent of those saw earnings growth, according to UBS Securities.
Growth guidance was particularly strong in sectors, including non-ferrous metals, electronics, property, light manufacturing and chemicals, it said.
Although solid earnings help short-term sentiment, “we reiterate our view that earnings growth could slow to 5 per cent in H2 and recommend investors to be more defensive,” wrote UBS analyst Gao Ting, who warned that financial regulation will likely remain tough.
Echoing concerns about liquidity, OCBC analyst Tommy Xie cautioned that “it may be too early for market to lower the guard against the regulatory tightening as we think financial de-leverage remains top policy priority for China.”
He said July will be another important month to monitor given that during it, sizeable loans made under the central bank's medium-term lending facility (MLF) will mature.
Small-caps outperform blue-chips on Monday, with the SSE 50 Index dropping 0.6 per cent, while the start-up board ChiNext was up nearly 1 per cent.
Financial and consumer stocks fell sharply on profit-taking but commodity shares rose on the back of higher raw material prices triggered by recent dollar weakness.
Hong Kong
In Hong Kong, the Hang Seng index added 0.1 per cent to 25,784.79 points, while the Hong Kong China Enterprises Index gained 0.4 per cent to 10,403.57.
Index heavyweight HSBC Plc - which on Monday conducted the first deal under the “Bond Connect” - rose nearly 2 per cent, while BOC Hong Kong, another beneficiary of the scheme that allows foreign investors to buy China bonds, jumped more than 3 per cent.
Hong Kong's small-caps and mid-caps rose sharply after Beijing on Friday allowed insurers to buy the city's stocks under the Shenzhen-Hong Kong Stock Connect, potentially boosting demand for smaller companies. But the services index in Hong Kong was down 1.5 per cent.