July 19, 2011 / 4:55 AM / 7 years ago

HK, China shares weak as debt woes trump low valuations

* Hang Seng index down 0.3 percent, Shanghai Comp off 0.5 percent

* Turnover in HK stays low as traders cite summer lull, debt woes

* Defensives find favour but valuations looking expensive (Updates to midday)

By Vikram Subhedar

HONG KONG, July 19 (Reuters) - Hong Kong and China shares edged lower on Tuesday on another day of light volumes as lingering debt woes in the United States and the euro zone gave investors little incentive to take on risk.

The usual summer lull in trading activity was amplified by a political stalemate in the U.S. over raising the debt ceiling and dealing with the ballooning deficit as well as fears over a potential Greek default.

The Hang Seng index fell 0.3 percent to 21,740.8 by the midday trading break, with turnover on the local exchange failing to hit HK$30 billion ($3.8 billion) for a second successive day, mirroring soft volumes across other Asian markets. Chart support for the benchmark is at its June low around 21,508.

“The summer doldrums are in full swing,” said a Hong Kong-based trader at an Asian bank.

“Eurozone worries and U.S. debt ceiling uncertainties persist despite better-than-expected results from most U.S. companies,” said the trader, referring to strong results from tech giant IBM and Wynn Resorts .

On the mainland, the Shanghai Composite was down 0.5 percent, hovering just above the 2,800 level, as materials and manufacturing companies fell. Anhui Conch Cement , down 2.7 percent, was the top drag.

Casino operator Wynn’s forecast-beating second quarter results failed to lift shares of Hong Kong-listed unit Wynn Macau which fell 1.3 percent. Other casino names also fell, with SJM Holdings down 2.7 percent.

Defensive stocks such as utilities saw gains as investors sought safety, with HK & China Gas up 1.2 percent and the top gainer on the Hang Seng index.

Long-term investors, in particular pension funds, shifting funds to defensive sectors over the past quarter as markets slumped have pushed up valuations of utilities above historical levels even as the broader market trades at multi-year lows.

HK & China Gas trades at 24.3 times forward 12-month earnings, a 27 percent premium to its historical median, according to Thomson Reuters Starmine. CLP Holdings , up 0.5 percent and hovering near a record high, trades at a 26.4 percent premium.

By contrast, the China Enterprises Index of top Hong Kong-listed mainland firms trades at about 8 times forward earnings, the lowest level seen since the aftermath of the Lehman Brothers collapse in 2008.

“The Chinese market is cheap because the banks are cheap,” said Khiem Do, head of the multi-asset group at Barings Asset Management, in a Reuters television interview.

“If you exclude the banks, the Chinese market trades at about 10 times,” said Do, warning that investors need to be selective because even though some sectors looked cheap they were not growing, such as telecoms.

Potential stake sales by large investors, capital raising fears and uncertainties around the extent of bad loans are seen likely to keep valuations in the banking sector low, at least until half-yearly results next month offer evidence that banks can earn their way out of trouble.

China Merchants Bank said on Monday it would raise up to 35 billion yuan ($5.4 billion) in a Hong Kong and Shanghai rights issue to replenish capital.

$1 = 7.797 Hong Kong Dollars Editing by Jonathan Hopfner

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