HONG KONG: Hong Kong stocks declined as Shanghai's government denied a report it will allow individuals to invest abroad and on speculation Beijing will withdraw stimulus measures to prevent its economy from overheating.

The Hang Seng Index declined 319 points or 1.8 percent to 21,286.17 at the close. The gauge climbed 1 percent Tuesday, halting a five-day, 4.3 percent drop, after Caijing magazine reported individuals will be allowed to invest in Hong Kong and "other overseas areas". The report cited Fang Xinghai, head of Shanghai's financial services office. However, the Shanghai government said the report is a "pure fabrication".

Beijing this week scrapped a plan to allow its nationals to buy Hong Kong stocks directly, abandoning the "through train" proposal that drove the Hang Seng to a record in October 2007.

The Hang Seng China Enterprises Index, which tracks so-called H-shares of Chinese companies, slipped 2.5 percent to 12,282.09.

"With the prospect of inflation starting to rear its ugly head, central bankers are now trying to tighten policy," Arjuna Mahendran, chief investment strategist for Asia at HSBC Private Bank, said to Bloomberg.

"Monetary tightening is having the desired effect, which is to see that the stock market doesn't get too exuberant," Mahendran said.

Bank of China Ltd, the nation's third-largest lender, sank 3.4 percent to HK$3.95. China Construction Bank Corp, the No 2 bank, dropped 3.1 percent to HK$6.22. Industrial & Commercial Bank of China Ltd, the biggest, slipped 2.6 percent to HK$5.89.

Liu Mingkang, chairman of the China Banking Regulatory Commission, confirmed yesterday in Hong Kong that his agency has asked some banks to limit lending after they failed to meet certain requirements that include capital ratios. He did not identify the banks.

Beijing has been scaling back some of its stimulus measures to prevent the economy from overheating, raising the reserve requirement for banks, effective this week.

In a speech to the country's State Council yesterday, Premier Wen Jiabao excluded references to relatively loose monetary policy and proactive fiscal policy, according to Bank of America Corp's Merrill Lynch unit. The exclusions may mark "a significant change in China's policy stance and officially draws an end to the emergency mode of government policies," Merrill Lynch economist Lu Ting said.

"It looks like the market interprets Premier Wen's speech as an all-out tightening, including monetary policies," said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co, which manages about $285 million. "Interest-rate increases are something that will surely happen this year," Wu predicts.

Cheung Kong Holdings, a developer owned by billionaire Li Ka-shing, dipped 1.4 percent to HK$98.60. Henderson Land Development Co, which gets 12 percent of sales from the mainland, slid 2.5 percent to HK$54. Glorious Property Holdings Ltd, a real estate developer in 10 Chinese cities, fell 2.4 percent to HK$3.20.

Hang Seng Index futures fell 1.6 percent to 21,256. Six stocks fell for each that rose on the 42-member gauge.

Bloomberg News

(HK Edition 01/21/2010 page4)