Hong Kong, China shares sluggish, banks slip on possible bond default

Wed Mar 5, 2014 12:00am EST

* HSI +0.2 pct, H-shares -0.4 pct, CSI300 -0.2 pct

* China tech, Macau casinos outperform tepid market

* Coal stocks sink after Beijing declares 'war' on pollution

* Solar-industry firm says it can't make bond payments due Friday

By Clement Tan

HONG KONG, March 5 (Reuters) - Hong Kong and China shares were sluggish early on Wednesday, with the Chinese banking sector weaker on worry about a possible default by listed company and Beijing's plan to introduce deposit insurance.

Premier Li Keqiang also said at the start of the China's annual parliamentary session, that the country's 2014 growth target will be kept at 7.5 percent, inflation at 3.5 percent and broad M2 money supply growth at 13 percent.

But fixed asset investment (FAI) growth this year will be targetted at 17.5 percent, lower than 19.6 percent in 2013 and retail sales growth at 14.5 percent, compared to 11.3 percent growth in 2013.

Some analysts had expected the growth target to be only 7 percent. Hong Hao, chief equity strategist at Bank of Communication, said that given the slower growth in fixed asset investment, it's going to be more difficult to reach the 7.5 percent target.

At midday, the Shanghai Composite Index and the CSI300 of the largest Shanghai and Shenzhen A-share listings were both down 0.2 percent. The Nasdaq-style ChiNext Composite Index of mostly high tech startups listed in Shenzhen rose 0.6 percent.

The Hang Seng Index inched up 0.2 percent to 22,711.3 points, while the China Enterprises Index of the leading offshore Chinese listings in Hong Kong slipped 0.4 percent. Turnover at midday was lackluster.

Loss-making Chinese solar equipment producer Chaori Solar said it will not be able to meet interest payments on bonds due on Friday in what would be the country's first-ever domestic bond default.

Hong of BoComm said the possible bond default hurt shares more on Wednesday than the announcement on Chinese economic goals. "Chaori Solar is one of China's larger solar companies so it's a surprise the government didn't help them," he said.

"I think we can expect to see more defaults this year," he said, adding that companies may get more highly leveraged this year to drive growth.

The Chinese technology and Macau casino sectors were outperformers. Internet giant Tencent Holdings and Sands China each climbed more than 2 percent to near record highs.

Gold miners were weaker after recent strong gains as risk aversion over the Ukraine-Russia situation receded. Zijin Mining sank 2.5 percent in Shanghai in its first loss in four days. Its Hong Kong listing shed 1.1 percent.

China Coal Energy sank 1.3 percent in Hong Kong and 0.2 percent in Shanghai after Beijing said it will cut excess industrial capacity a year earlier than planned and "declared war" on pollution through reforms in energy pricing to boost non-fossil fuel power.

A official pledge to make timely adjustments to on-grid tariffs for wind power lifted GCL-Poly Energy by 3.6 percent to its highest in more than a month in Hong Kong.

Sector leading Anhui Cement Conch rose 1.4 percent in Hong Kong and 1.5 percent in Shanghai, shrugging off losses for small rivals after Premier Li announced plans to cut 42 million tonnes of cement capacity this year.

China Construction Bank (CCB) sank 1.3 percent in Hong Kong and 0.3 percent in Shanghai as the benchmark seven-day repo short term cash rate climbed another 80 basis points.

A deposit insurance program for China's banks would be the next incremental move toward freeing up deposit rates.

More details on China policies, including on reform of state-owned enterprises, may be released over the next few days. The National People's Congress that started on Wednesday will end March 13.