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Hong Kong stocks come off lows amid hopes for trade talks

Meituan Dianping hits record on results, while China Shenhua and Sinopec slip

HONG KONG (Nikkei Markets) -- Hong Kong shares on Monday recovered a large part of their steep intraday losses as hopes for Sino-American trade talks helped lift sentiment in afternoon trading.

The Hang Seng Index declined 1.9% to 25,680.33 by the close, with 46 of its 50 constituents ending lower. The gauge had dropped as much as 3.6% earlier in the day, on track for its steepest single-day loss since February 2018, following a deterioration over the weekend in trade tensions and mounting worries over violent protests in the city.

Drugmakers Sino Biopharmaceutical and CSPC Pharmaceutical Group were the among the few stocks that ended higher on the Hang Seng Index, rising 0.7% and 0.8%, respectively. Chinese property developer Country Garden Holdings added 1.4%.

Pan-Asia insurer AIA Group slumped 2.9%, while Chinese internet services major Tencent Holdings declined 2.5%. Meituan Dianping, an online food-delivery-to-ticketing app operator backed by Tencent, jumped 8.9% after swinging to a profit in the second quarter from a loss in the year-ago period and reporting a 50.6% surge in revenue.

The Hang Seng Index's recovery coincided with a bounce for U.S. equity index futures, and came after U.S. President Donald Trump said at a Group of Seven summit in France that China has asked for a resumption of trade talks. Also helping sentiment, Chinese Vice Premier Liu He said on Monday that Beijing was willing to settle the trade war through negotiations, and firmly opposed moves to escalate the row.

Futures on the Dow Jones Industrial Average were up more than 200 points by late afternoon in Asia.

Linus Yip, chief strategist at First Shanghai Securities, said investors have been sensitive to news about the trade war. Still, "I don't expect the friction between China and the U.S. could be resolved any time soon," he added.

As many as 46 of the Hang Seng Index's 50 constituents ended weaker on Monday. Turnover on the Hong Kong Stock Exchange's main board was higher than usual at 104.19 billion Hong Kong dollars ($13.28 billion).

The Shanghai Composite Index gave up 1.2%, while the yuan traded onshore dropped 0.8% against the U.S. dollar to 7.1503.

The day began on a weak note for regional markets after an escalation over the weekend in the trade spat between the world's two largest economies.

China on Friday said it will impose new tariffs of 5% to 10% on $75 billion in American goods, in retaliation over U.S. plans to apply 10% tariffs on $300 billion of Chinese goods. Beijing also said it will reinstate a 25% tariff on U.S. automobiles and auto parts, effective Dec. 15.

In response, Trump announced that tariffs on $250 billion worth of Chinese goods will be increased to 30% from 25%, effective Oct. 1. He also said a planned 10% import duty on $300 billion of Chinese goods will also be increased to 15%.

"If the trade war continues, various industries could be affected," said Patrick Pun, head of investment at TC Concord Asset Management. "If original equipment manufacturers in Japan, South Korea and Taiwan cut or slow down production because of the trade war, we will see a ripple effect in regional economies."

Intensifying anti-government protests in Hong Kong also added to the jitters. Weekend clashes between demonstrators and the police resulted in the latter using water cannons for the first time since the protests began in June. The police also used tear gas after activists threw several petrol bombs.

China's state-owned Xinhua News Agency said in a commentary piece on Sunday, citing former leader Deng Xiaoping as saying, that Beijing not only has the authority but also "the responsibility to intervene when riots take place in Hong Kong."

Protests in the city have turned violent more frequently in recent days, with the government not agreeing to their demands, which include the complete withdrawal of a controversial -- but now-suspended -- extradition bill, an independent inquiry into the police's use of force and universal suffrage.

Meanwhile, there have also been multiple reports of Chinese military personnel and vehicles gathering in Shenzhen, across the northern border from Hong Kong, leading to fears of a direct intervention by mainland authorities to quell the unrest in the former British colony.

"If suasion fails, a more forceful intervention might follow. ... Deployment cannot be ruled out," Carl Tannenbaum, chief economist at Northern Trust, wrote in a note. "A heavy-handed intervention could prompt a substantial flight of people, firms and capital, which would be harmful to both sides."

Hong Kong rail operator MTR fell 1.5%. The company shut down its Kowloon Bay headquarters for a day on Monday amid concerns over staff safety after it closed multiple stations over the weekend.

Nomura on Monday downgraded the MSCI Hong Kong Index to "underweight" from "overweight," citing concerns that the ongoing unrest is affecting retail sales, tourism and property prices, and the outlook for corporate earnings.

"We are cautious on the market, although we recognize that any resolution on the political front could lead investors to return to the market given that it is indeed home to a number of high-quality dividend yielding names," Chetan Seth, an analyst at Nomura, wrote in a note.

China Shenhua Energy declined 2.5% after reporting a 1.1% decrease in first-half net profit and an 8.6% drop in revenue. China Petroleum & Chemical (Sinopec) slid 2.6% following a 24.7% decline in profit for the January-to-June period.

Automaker Brilliance China Automotive Holdings fell 3.9% to HK$7.41 after reporting a 9.5% decline in first-half profit amid slowing sales in the domestic market. Nomura maintained its "neutral" rating on the stock, but cut its price target to HK$8.80 from HK$10.20.

Future Land Development Holdings slid 4.4% following a 4.2% drop in first-half net profit.

-- Benny Kung

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