Bloomberg News

China’s Stocks Head for Longest Weekly Losing Streak Since 2004

January 06, 2012

Jan. 6 (Bloomberg) -- China’s stocks headed for their longest weekly losing streak since 2004 on concern small companies are struggling to borrow money because of a cash crunch and that an export slowdown will drag down the economy.

SAIC Motor Co. fell 2 percent, leading declines for consumer companies that are reliant on growth in China’s economy. Ufida Software Co. slid 3.5 percent, adding to a 12 percent plunge this week. Tianjin Tasly Pharmaceutical Co. dropped to the lowest level since April, pacing declines for drugmakers. PetroChina Co., the nation’s biggest energy producer and most valuable company, gained 1.3 percent after the government raised the threshold of a windfall tax on crude.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 0.4 percent to 2,140.73 as of 1:08 p.m. local time. The measure has lost 2.7 percent this holiday- shortened week, poised for the longest weekly losing streak since the week ended June 25, 2004. The CSI 300 Index slumped 0.6 percent to 2,262.57 today.

“Liquidity is still weak and there are no signs of the reserve ratio being cut,” said Cao Xuefeng, an analyst at Huaxi Securities Co. in Chengdu.

Small-company stocks have plunged this week because of investor disappointment that lenders’ reserve-requirement ratios haven’t been cut amid signs of a cash crunch as households prepare for Lunar New Year celebrations that start on Jan. 23. The Shenzhen Composite Index lost 1.7 percent today, adding to a 7.7 percent slump since the start of the new year. The ChiNext index of start-up companies fell 2.6 percent today, and is down 11 percent this week.

Cash Crunch

The People’s Bank of China is injecting the most funds in eight weeks into the financial system. The central bank added a net 51 billion yuan ($8.1 billion) to the banking system this week as bill redemptions exceeded issuance, and canceled a second straight auction of three-month notes yesterday.

China’s seven-day repo rate fell 20 basis points to 4.31 percent today in Shanghai, based on a daily fixing by the National Interbank Funding Center. That compares with an average 3.82 percent for the fourth quarter of 2011. Royal Bank of Scotland Plc, Societe Generale SA and Credit Agricole SA said they believe policy makers are targeting a rate of no more than 3 percent.

Economists at Barclays Capital and Bank of America Corp. say the central bank will cut lenders’ reserve requirements before the Chinese New Year holiday, the second reduction since 2008. The People’s Bank of China raised reserve ratios six times last year to cool inflation that accelerated to its fastest pace in three years in July.

Record Low Valuations

The Shanghai Composite trades at 8.7 times estimated earnings, a record low according to Bloomberg data dating back to 2006, after plunging 22 percent last year on concern increases in borrowing costs and Europe’s debt crisis will derail economic growth. The CSI 300 slid 25 percent in 2011.

Goldman Sachs Group Inc. said more cuts in banks reserve- ratio requirements and loosening of loan quotas are needed to ease liquidity and that there will be no imminent recovery for A-shares until liquidity is “sufficiently supportive.”

China’s economic growth will continue to weaken with relatively tight liquidity in the real economy and earnings growth forecasts facing downward pressure, Goldman Sachs said in a report dated Jan. 3. The earnings downgrade risk for small and mid-caps is “still high” given tight liquidity, it said.

Technology Stocks

Ufida Software dropped 3.5 percent to 15.90 yuan. Sanan Optoelectronics Co., China’s biggest listed manufacturer of light-emitting diode chips, fell 2.3 percent to 10.28 yuan. CPT Technology Group Co. plunged 9.9 percent to 12.03 yuan in Shenzhen.

The China Banking Regulatory Commission should raise the acceptable non-performing loan ratio in lending for small technology companies, the China Securities Journal reported, citing Wang Huaqing, the regulator’s disciplinary commissioner.

A gauge of drugmakers in the CSI 300 slid 1.7 percent today, adding to a 8.1 percent loss for the week, the most among 10 industry groups. Tasly, which produces Chinese medicine, fell 3.2 percent to 37.37 yuan.

Growth in goverment health-care spending this year will exceed overall government budget increases, supported by a need to build a social safety net and reduce social inequality, Katherine Lu, analyst at Cowen and Co., said in a report dated yesterday. Product pricing control, a “sluggish” export environment and “uncertainties” over economic growth are “near-term overhangs” for Chinese drugmakers, she said.

Consumption Policies

A measure of consumer discretionary stocks slumped 1.5 percent today. SAIC, China’s biggest automaker, fell 2 percent to 14.10 yuan. Beijing Wangfujing Department Store (Group) Co. led declines for retailers, sliding 3.3 percent to 29.72 yuan.

The Chinese economy expanded 8.6 percent from a year earlier in the fourth quarter, the least since June 2009, according to the median estimate of 21 economists surveyed by Bloomberg. Export growth slowed to a two-year low of 13.5 percent in December.

China will roll out measures to boost consumption this year as it strives to meet challenges posed by a global slowdown, Commerce Minister Chen Deming said.

The government is studying policies to encourage spending on energy-saving products, and will take other measures including the promotion of online shopping and tourism, Chen told the ministry’s annual works conference, according to a statement posted on its website yesterday.

PetroChina gained 1.3 percent to 9.93 yuan after China’s finance ministry increased the threshold of the tax to $55 per barrel from $40, effective Nov. 1, 2011.

Citigroup Inc. estimated a 16 percent “positive impact” on PetroChina full-year earnings from the cut in the windfall profit tax. PetroChina becomes the top pick among three large- cap China oil stocks instead of China Petroleum & Chemical Corp. because of PetroChina’s “higher sensitivity” to the tax cut and Sinopec’s recent outperformance, Citigroup analyst Graham Cunningham said in a report dated yesterday.

-- Editors: Allen Wan, Darren Boey

To contact Bloomberg News staff for this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

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


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