China stocks flat as rebound peters out; Hong Kong shares drop

China stocks ended Thursday morning roughly flat as an early morning rebound lost momentum, reflecting how investors’ confidence in the economy remains shaky.

Hong Kong shares continued to slide, after the benchmark index broke through a key technical support level during the previous session’s tumble.

“Investors are facing mounting uncertainty,’’ said Hong Hao, chief China strategist at Bocom International Holdings Co.

He added that the Federal Reserve’s decision to hold rates last week is sending a signal that the economy is not good, so “deteriorating fundamentals pose the biggest risk to equity markets’’.

China’s key indexes had a good start, with the SSEC up 1.1 per cent at one point, but the gains were then pared.

At lunchtime, the CSI300 index was up 0.2 per cent at 3,269.52 points, while the Shanghai Composite Index gained 0.3 per cent to 3,124.17 points.

The China market has stabilised in recent weeks after slumping over 40 per cent from its mid-June peak, thanks to a barrage of government rescue measures.

But technically, key indexes are still in a downward trend, while drastically reduced trading volume suggests many investors are staying out of the stock market.

There’s anecdotal evidence investors burnt by the market crash are cutting back spending, potentially hitting consumption, an important growth engine for China’s economy.

“The fear is that the stock market could be mired in prolonged bearishness, something that could last for years,’’ said Chang Chengwei, analyst at Hengtai Futures.

Banking stocks remained weak, although some analysts see value in them.

“We recently turned positive on China banks owing to their attractive valuation,’’ Barclays said in a note on Thursday, identifying China Construction Bank and China Merchants Bank as its preferred picks in the sector.

Real estate stocks fell despite signs of a mild recovery in China’s property market.

China Merchants Property slumped 10 per cent, the downward daily limit, after its shares resumed trading following a restructuring that made it the country's biggest listed developer, toppling China Vanke Co.

In Hong Kong, the Hang Seng index dropped 0.9 per cent to 21,103.80 points, while the Hong Kong China Enterprises Index lost 1.4 per cent to 9,438.49.

Most main Hong Kong sectors fell, with financial and energy stocks leading the decline.

“The Hong Kong market has fallen a lot, but it’s too early to judge if the market has bottomed out, as investor confidence toward the economy is very fragile,’’ said Linus Yip, chief strategist at First Shanghai Securities.

“Remember, we are still in a down cycle.’’