Bloomberg News

China Stocks Drop to Nine-Month Low on Inflation, Growth Concern

June 20, 2011

June 20 (Bloomberg) -- China’s stocks fell to the lowest level in almost nine months after Nomura Holdings Inc. forecast the central bank will raise interest rates and Credit Suisse Group AG said the country is heading for a “sluggish landing.”

Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. paced declines for lenders after Credit Suisse cut its rating on banking shares to “underweight.” PetroChina Co. lost 1 percent as crude traded near a four-month low. Poly Real Estate Group Co., China’s second-largest developer, rose to a two-month high on speculation the government won’t intensify housing curbs after prices cooled in some cities.

“The big picture is that there’s a capital crunch for the market after all these government tightening measures,” said Zhang Ling, general manager at Shanghai River Fund Management Co. “It’s probably the worst time for stocks now.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 21.6 points, or 0.8 percent, to 2,621.25 at the 3 p.m. local time close, the lowest since Sept. 29. The CSI 300 Index fell 0.6 percent to 2,874.90.

The Shanghai Composite has slumped 14 percent from this year’s high on April 18 on concern government measures to cool inflation will slow economic growth. The central bank has raised reserve requirements 12 times and interest rates four times since the start of last year. The stock index has lost 6.8 percent this year, extending the 14 percent retreat in 2010.

Rate Outlook

China is likely to raise rates within the next 10 days as price pressures encourage the government to end the longest pause since increases began in October, Nomura said.

The world’s second-biggest economy is maintaining momentum and “inflation is still high,” Nomura economist Sun Chi said in a phone interview from Hong Kong today. Sun reaffirmed a forecast for an increase by the end of June.

Inflation is likely to grow 5.5 percent in June, which is expected to be the fastest this year, the Shanghai Securities News reported over the weekend, citing Zheng Xinli, deputy director of the China Center for International Economic Exchanges. Inflation for the whole year is estimated at 4.8 percent, Zheng said at a conference yesterday, according to the newspaper.

The Shanghai Composite is valued at 12.2 times estimated earnings for this year, compared with a five-year average of 18.9, according to weekly data compiled by Bloomberg.

ICBC, the nation’s biggest listed lender, dropped 0.7 percent to 4.26 yuan. Bank of China, the third largest, fell 1.3 percent to 3.05 yuan.

‘Credit Overhang’

People’s Bank of China data show lenders face a larger- than-expected “credit overhang,” Credit Suisse analysts led by Vincent Chan wrote in a report. They cut their ratings on banking shares to “underweight” from “overweight,” while increasing utilities to “overweight” from “market weight.”

The analysts also lowered their 12-month forecast for Hong Kong’s Hang Seng China Enterprises Index to 15,000 from 17,500, and reduced the target for the Shanghai A-Share Stock Price Index to 3,000 from 3,650. Their estimate for the MSCI China Index was cut to 76 from 89, according to the report.

PetroChina, the nation’s biggest oil company, retreated 1 percent to 10.66 yuan. China Oilfield Services Ltd., the drilling unit of the nation’s largest offshore oil producer, retreated 1.9 percent to 16.46 yuan. Oil for July delivery fell as much as 1.7 percent to $91.42 a barrel in electronic trading in New York today.

Copper Stocks

Jiangxi Copper Co., China’s biggest producer of the metal, dropped 0.6 percent to 32.34 yuan. Tongling Nonferrous Metals Group Co., the second largest, slid 3.1 percent to 21.35 yuan.

Copper in London dropped for the third time in four days on concern Greece’s debt crisis may worsen after euro-area finance ministers failed to reach an agreement on disbursement of aid to the country. The metal for three-month delivery on the London Metal Exchange fell as much as 1.3 percent to $8,980 a metric ton.

Poly Real Estate gained 2.9 percent to 10.43 yuan, the highest close since April 22. China Vanke Co., the nation’s biggest listed property developer, rose 1.6 percent to 8.18 yuan. Gemdale Corp. added 1.3 percent to 6.15 yuan.

Existing home prices in May fell from the previous month in 23 of 70 cities measured, the National Bureau of Statistics said June 18. That’s more than the 16 cities that posted declines in April, it said. Existing home prices in Beijing fell 0.2 percent from April while those in Shanghai increased 0.2 percent, according to the bureau.

Citic Securities Co. said it has turned “positive” on China stocks, citing government measures to finance construction of affordable housing as well as water conservancy projects and to support small companies. The brokerage had been “cautious” about the nation’s stocks since April.

The measures will offset a slowdown in the economy as growth in the third quarter is expected to hit a “low ebb,” analysts led by Xi Feng at the brokerage wrote in a report today.

--Zhang Shidong. Editor: Allen Wan

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

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


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