Bloomberg News

Most China Stocks Fall on Concern Rally Overvalues Profit

February 28, 2012

Employees work on the trading floor of the Shanghai Stock Exchange in Shanghai. The Shanghai Composite Index  lost 9.59 points, or 0.4 percent, to 2,437.47 at the 11:30 a.m. local-time break, set to snap a seven-day, 3.8 percent gain. Photographer: Kevin Lee/Bloomberg

Employees work on the trading floor of the Shanghai Stock Exchange in Shanghai. The Shanghai Composite Index lost 9.59 points, or 0.4 percent, to 2,437.47 at the 11:30 a.m. local-time break, set to snap a seven-day, 3.8 percent gain. Photographer: Kevin Lee/Bloomberg

Most Chinese stocks fell as bets that the benchmark index’s rally to a three-month high was overdone overshadowed speculation the government will ease bank- lending restrictions.

China Oilfield Services Ltd. dropped 0.7 percent after oil prices sank for a second day. Suzhou Anjie Technology Co., which supplies devices to Apple Inc., slid 4 percent, leading a gauge of small companies down from the highest level since Dec. 2. Agricultural Bank of China Ltd. gained 0.7 percent after the China Securities Journal said regulators had allowed banks to continue lending to local governments for some projects.

About nine stocks fell for every five that rose on the Shanghai Composite Index (SHCOMP), which closed 0.2 percent higher at 2,451.86. The gauge, which swung between gains and losses at least 11 times today, settled at the highest level since Nov. 17. The CSI 300 Index (SHSZ300) added 0.2 percent to 2,662.46. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, retreated 0.7 percent yesterday.

“The run-up is a bit fast and the pressure for a correction is increasing,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The market needs a break here and we also need to see coming economic data will be good to justify the rally. Trading will be volatile going forward.”

The 14-day relative strength measure for the Shanghai Composite, measuring how rapidly prices have advanced or dropped during a specified time period, was at 71.1 yesterday. Readings above 70 indicate a price may be poised to fall.

Manufacturing Index

The Shanghai index has advanced 7 percent this month, heading for the biggest monthly gain since October 2010, on optimism the central bank will add to a Feb. 18 cut in reserve requirements to halt a decline in economic growth. For the year, the measure has rebounded 11 percent and trades at 10.2 times estimated profit, compared with a record low of 8.9 times on Jan. 6, weekly data compiled by Bloomberg showed.

China’s statistics bureau and logistics federation are scheduled to release a manufacturing index for this month on March 1. The measure may rebound to 50.9, according to the median estimate of 22 economists in a survey by Bloomberg News. It was at 50.5 in January, above the 50 threshold for expansion.

China Oilfield, the drilling unit of the nation’s largest offshore oil producer, slid 0.7 percent to 17.68 yuan, trimming its gain to 22 percent this year. Offshore Oil Engineering Co. (600583), a unit of the country’s third-largest oil producer, sank 0.3 percent to 6.15 yuan.

Oil for April delivery in New York fell as much as 0.7 percent to $107.84 a barrel in electronic trading today. Futures retreated 1.1 percent to $108.56 a barrel yesterday, after reaching a nine-month high on Feb. 24.

Small Companies

The Shenzhen Stock Exchange Small and Medium Enterprises Index dropped 0.9 percent today after rising for six days to the highest level since Dec. 2. Suzhou Anjie slumped 4 percent to 31.86 yuan after jumping by the 10 percent daily limit yesterday. NavInfo Co., a developer of electronic maps, fell 1.7 percent to 23.79 yuan.

China’s yuan-denominated A shares may decline late next month amid what could be a “sensitive reporting season” for the nation’s companies, according to UBS AG.

The brokerage recommends investors reduce allocations to cyclical industries such as coal and non-ferrous metals, Li Chen, a UBS strategist, wrote in a report dated today. UBS suggests gradually buying stocks of food, beverage, traditional medicine and some retail stocks when markets retreat.

There is “potential downside risk in late March,” the strategist wrote. “We do not support aggressive positioning before there is enough evidence of the economy bottoming out.”

Trailing Estimates

One hundred and twenty-six companies in the Shanghai Composite have reported annual profits since Jan. 1, gaining 18 percent on average and trailing estimates by 5.3 percent, according to data compiled by Bloomberg. That compares with an increase of 38 percent in the previous year.

A measure of financial stocks in the CSI 300 advanced 0.6 percent today. Agricultural Bank, the nation’s fourth largest by assets, added 0.7 percent to 2.76 yuan. China Citic Bank Corp. (601998), the banking unit of the nation’s largest investment company, climbed 2 percent to 4.58 yuan.

Bank of Ningbo Co., part-owned by Singapore’s Oversea- Chinese Banking Corp., rose 1 percent to 10.20 yuan after saying in a preliminary earnings statement yesterday that profit increased 40 percent last year.

Local Governments

The China Banking Regulatory Commission has allowed banks to continue lending to local government financing vehicles for land reserves and road construction, the China Securities Journal reported today.

Local government financing vehicles can also continue to borrow for projects that have been more than 60 percent completed, according to the newspaper. The regulator had previously allowed new loans only for building affordable housing units, it said.

China may loosen property-market policies at the end of the first quarter or early in the second quarter, Helen Qiao, an economist at Morgan Stanley, said in Beijing yesterday. Increasing pressure from local authorities may cause the change, she said.

The China Securities Regulatory Commission has asked brokerages and mutual funds to “lead the way” in making “value” investments in shares of “blue chip” companies in China, the Shanghai Securities News reported today, citing an unidentified CSRC official.

--Zhang Shidong. Editors: Darren Boey, Chan Tien Hin

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

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


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