Hong Kong Stocks Flat Amid US Debt Ceiling Battle

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Hong Kong shares opened slightly lower on Thursday, tracking Wall Street's worst day in eight weeks. Some analysts think the U.S. debt ceiling crisis may force China to diversify its foreign reserves.

Hong Kong's Hang Seng opened slightly lower on Thursday, hurt by weak US economic data and a deadlock in talks to raise the US debt ceiling.

But losses on the day could be capped by hopes of favorable local earnings results, particularly those of Chinese banks.

US stocks fell sharply on Wednesday in the fourth consecutive day of losses, as investors feared the country's debt-ceiling stand-off could force a default or downgrade of US Treasury debt.

Most market participants believed the deficit reduction proposals being discussed in US Congress fall short of the budget cuts necessary to avert a debt downgrade by ratings agencies, leading some experts to believe the debt crisis may force China to diversify its foreign reserves.

[Andy Xie, Independent Analyst]:
"I think this raises serious issues over the dollar's long-term value. I think in that regard, the Chinese government may come to the conclusion that its dependency on the dollar as the currency to anchor China's monetary policy as well as for international trade should come to an end. So China may choose to float its currency and stop buying the dollar possibly within five years."

While top US lawmakers worked behind the scenes on a compromise, looking to salvage a last-minute deal from rival debt plans, investors grew increasingly jittery ahead of the August 2 deadline for the United States to avoid a default.

The three main ratings agencies have all warned the United States' coveted AAA credit rating status would be in serious jeopardy if the White House and Congressional Republicans cannot reach a deficit reduction agreement.

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