Bloomberg News

China Stocks Fall, Capping Second Weekly Loss, on Policy Concern

June 17, 2011

June 17 (Bloomberg) -- China’s stocks fell, capping a second straight weekly loss for the benchmark index, on concern the central bank will take more steps to cool inflation.

Agricultural Bank of China Ltd. led a retreat by banks on speculation higher interest rates would curb loan growth. Aluminum Corp. of China Ltd., the largest producer of the metal, paced declines by commodity companies amid concern slowing economic growth will limit demand for metals.

“There’s no reason to buy into the market now because of the uncertainty over further monetary policies,” said Hao Kang, a Beijing-based fund manager at ICBC Credit Suisse Asset, which oversees $8.7 billion.

The Shanghai Composite Index lost 21.46, or 0.8 percent, to 2,642.82 at the 3 p.m. close, the lowest since Sept. 29 and capping this week’s retreat at 2.3 percent. The CSI 300 Index slid 0.9 percent to 2,892.16.

Concern the world’s second-largest economy is slowing has dragged the Shanghai gauge down 14 percent from this year’s high on April 18. The central bank announced a half percentage point boost in the reserve requirement ratio for banks on June 14, adding to its 11 reserve-requirement and four interest-rate increases since early 2010 to cool inflation. The stock index has lost 5.9 percent this year, extending the 14 percent retreat in 2010.

Shanghai Composite stocks trade for 12.3 times estimated profit, compared with an average 19.6 times in the past five years and 10.7 times for the MSCI Emerging Market Index, according to data compiled by Bloomberg.

Commodity Producers

Agricultural Bank of China dropped 0.6 percent to 2.64 yuan. China Citic Bank Corp. slid 1.9 percent to 4.74 yuan, the lowest since April 27, 2009.

The central bank increased the yield on three-month bills for the first time in 10 weeks yesterday, spurring speculation of further monetary tightening.

The People’s Bank of China sold 1 billion yuan ($154 million) of the securities at 2.9985 percent, up from 2.9168 percent last week, according to a statement on its website yesterday. China Development Bank Corp., the nation’s second- largest issuer of bonds, scrapped a 20 billion yuan offering of floating-rate notes due to “market conditions,” a statement on Chinabond, the biggest debt clearing house, said.

“The move by the PBOC to raise yields sends a strong signal for an imminent rate hike in coming days,” Wee-Khoon Chong, a fixed-income strategist at Societe Generale SA in Hong Kong, wrote in a research report yesterday. “A hike in benchmark rates shouldn’t be a big surprise as it is well expected.”

‘Further Pullback’

A gauge tracking material companies slipped 2.4 percent, the most among the CSI 300 Index’s 10 industry groups. Aluminum Corp. of China lost 6 percent to 10.60 yuan, the most since Nov. 12. Laiwu Steel Corp. sank 6.7 percent to 8.98 yuan. Hebei Iron & Steel Co. dropped 2.3 percent to 4.28 yuan.

The Shanghai Composite may extend losses by as much as 13 percent within three months, after falling below a “key support level” of 2,675, according to Trading Central Asia Ltd. The measure remains “capped” by a descending 20-day moving average, said Jeffrey Zhang, head of Asia research at Trading Central in Hong Kong.

“The slide below 2,675 should trigger a further pull back to 2,570 and then to 2,500 in the coming weeks,” said Zhang. “For the mid-term, the index is indeed under pressure. Further downside is more likely to 2,320 within one to three months.”

Momentum indicators on the Shanghai Composite including moving average convergence-divergence and the relative strength index are “negatively oriented” and capped by “bearish” trend lines, he said.

The stock gauge’s RSI, which measures how rapidly an index has risen or fallen in a specified time period, is at 32 and has stayed at 40 or below each day since May 20, data compiled by Bloomberg show. Some investors interpret a reading of 30 or below as a signal that stocks have been sold excessively.

--Irene Shen. Editor: Richard Frost

To contact Bloomberg News staff for this story: Irene Shen at ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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