Hong Kong shares lower in early trade on talk of China rate hike

Hong Kong shares were lower in early trade Friday on speculation China will announce another interest rate increase as early as today to cool its economy and curb inflation.

"The market is listless, with investors pretty much expecting the Chinese central bank to further increase interest rates," said Peter Lai, a DBS Vickers director.

China's inflation rate accelerated to its highest in 11 years in November. The central bank is expected to raise its benchmark one-year lending rate by at least 27 basis points before the year ends, after increasing it five times this year to 7.29 percent.

China's central bank has also increased the reserve requirement for bank deposits 10 times, bringing the requirement ratio to 14.5 percent, the highest in more than two decades, and imposed a cap on growth in bank lending for 2008.

At 10:20 am, the Hang Seng Index was down 197.77 points or 0.7 percent at 27,546.68.

Investors were also cautious about the initiative taken by the US Federal Reserve, European Central Bank and other central banks to join foces in easing the global credit crunch, which has heightened fears the credit crisis was getting worse as more banks got hit by losses from subprime exposure.

"The investors are only focused on two issues -- China's tightening economic policies and the subprime problem," said Tony Tong, deputy research head at China Everbright Securities.

Banks led the index lower as higher interest rates may discourage borrowings and cut their earnings. Chinese banks will put aside more funds as reserves on deposits starting December 25, limiting their ability to invest and earn more.

Bank shares also came under pressure after Hong Kong Monetary Authority (HKMA) chief executive Joseph Yam said some may incur losses or post lower profits because of their exposure to subprime mortgages in the US.

China's biggest bank, Industrial and Commercial Bank of China, fell 7 Hong Kong cents or 1.4 percent to 5.85 dollars.

China Construction Bank declined 8 cents or 1.2 percent to 6.90 dollars.

HSBC Holdings dropped 40 cents or 0.3 percent to 132.80 dollars, while unit Hang Seng Bank was down 1.40 dollars or 1 percent at 154.30.

Bank of East Asia slid 2 dollars or 4 percent at 49.60. BOC (Hong Kong), a unit of China's number two bank, eased 15 cents or 0.2 percent to 21.55 dollars. Its parent, Bank of China, lost 2 cents or 0.5 percent at 3.96 dollars.

Bank of China and BOC fell even after media reports that as of the end of September, Bank of China's subprime-related investments totaled 7.95 billion US dollars, down from 9.6 billion dollars at the end of June.

China Eastern Airlines was up 1 cent or 0.2 percent at 6.55 dollars. China Eastern president Li Fenghua said yesterday that the proposed strategic partnership with Singapore Airlines and Singapore state-linked investment company Temasek is the "only and ultimate option" for furthering its restructuring effort.

Singapore Airlines and Temasek agreed with China Eastern in September to buy a combined 25 percent stake in the mainland's third-largest airline.

Hutchison Telecom, a unit of Hong Kong tycoon Li Ka-shing's ports-to-telecoms conglomerate Hutchison Whampoa, firmed 4 cents or 0.4 percent to 11.48 dollars after saying that it would accelerate the rollout of its cellphone network in Indonesia with the assistance of Excelcomindo Pratama.

Parent Hutchison Whampoa was up 15 cents or 0.2 percent at 88.90 dollars.

Cathay Pacific Airways rose 10 cents or 0.5 percent to 20.25 dollars. Cathay said it and unit Dragonair carried 2 million passengers last month, 11 percent more than a year earlier.

Property counters were higher after Hong Kong banks this week cut their prime lending rates a quarter percentage point following a similar rate cut by the HKMA, the city's de facto central bank.

Cheung Kong (Holdings), Li's flagship property company, gained 80 cents or 0.6 percent at 140.20 dollars. Hang Lung Properties rose 10 cents or 0.3 percent to 34.35 dollars. Henderson Land added 40 cents or 0.6 percent to 72.90 dollars. Sino Land was up 20 cents or 0.8 percent at 26.15 dollars.

(1 US dollar = 7.80 Hong Kong dollars)