(Updates to close)
* Hang Seng down 2.2 pct; Shanghai Composite slumps 3.8 pct
* Cyclicals hit hardest in above-average turnover
* Forced selling by hedge funds could trigger more losses: strategist
* Shanghai losses not driven by Tuesday’s July inflation data: traders
By Clement Tan
HONG KONG, Aug 8 (Reuters) - Hong Kong and China shares fell sharply on Monday to their lowest since July 2010, with retail investors selling bank stocks and industrials in the wake of a U.S. credit rating downgrade that added to widespread risk reduction that was already under way.
An early uptick in European shares after the European Central Bank bought Italian and Spanish bonds helped Hong Kong shares cut losses on the day, after investors discounted an earlier pledge by G20 finance chiefs and central bankers to calm global markets.
However, shares in Hong Kong remained on shaky ground.
“People are trading on fear at the moment,” said Hong Hao, a global strategist at CICC. “This ECB move is just a short term fix, it doesn’t change anything fundamental.”
The Hang Seng Index fell for the fifth straight session, ending down 2.2 percent at 20,490.6 points, sinking the benchmark further into oversold territory on the charts as its relative strength index (RSI) value sank to its second-lowest since January last year.
Turnover declined almost 20 percent from Friday’s 8-1/2 month high as some investors chose to sit out the volatility. Traders and analysts said there were still investors holding onto assets that could spark steeper losses ahead.
“There are a lot of guys who’ve cashed out as much as their mandates allow them,” said a Hong Kong-based trader.
“If you are a long-short mutual fund, most of them don’t have the flexibility to hold a lot of cash so they have to be doing something somewhere,” he added.
CICC’s Hong said some hedge funds could be forced to sell in the near term, under pressure from spooked investors who want to cut their losses and sit out this period of volatility.
At one stage, the Hang Seng benchmark was down more than 4 percent, falling below a key support level at 20,370, its August 2010 low. It rebounded to finish above that level after the ECB was seen buying Spanish and Italian bonds.
Cyclicals were once again the hardest hit as risk aversion hit the roof, with the top three beta plays on the Hang Seng, Citic Pacific Ltd , China Coal Energy Co Ltd and Aluminium Corp of China Ltd (Chalco) among the benchmark’s biggest percentage losers.
Large cap oil counters led the Shanghai Composite Index to its biggest single-day loss since November 2010, sinking the benchmark deeper into oversold territory on the charts as its RSI value dived to its lowest since the depths of the 2008 financial crisis.
The Shanghai benchmark finished down 3.8 percent to 2,526.8 points, extending a losing streak into a second straight session as A-share turnover surged to 116.8 billion yuan $18.14 billion), the highest in a fortnight. The index closed at the lowest since July 2010.
PetroChina Co Ltd’s 3.1 percent decline was the top drag on the benchmark. It also plunged the stock deeper into oversold territory on the charts, leaving its price barely 2 percent above lows last seen at the height of the 2008 financial crisis.
Traders and analysts said Monday’s slump in China stocks was driven by global growth concerns after the downgrade in the U.S. long-term credit ratings, and not by Beijing’s scheduled release of July CPI data on Tuesday.
July inflation could remain above 6 percent, but a weak global market could slow the pace of interest rate increases by the Chinese central bank, which could boost the stock market, traders said. ($1 = 6.440 yuan) ($1 = 6.440 Chinese Yuan) (Additional reporting by Lu Jianxin in Shanghai; Editing by Richard Borsuk)