Bloomberg News

Most Chinese Stocks Fall as Profit Drop Overshadows ECB Pledge

July 27, 2012

Most Chinese stocks fell as a report showing Chinese industrial companies’ profits declined overshadowed a pledge by European Central Bank President Mario Draghi to preserve the euro.

Dam builder Sinohydro Group Ltd. (601669) and Xinjiang Ba Yi Iron & Steel Co. paced declines among industrial companies. Huadong Medicine Co. led a measure of health-care stocks to the biggest drop among industry groups after the China Securities Journal said the government will cut some drug prices. Chongqing Changan Automobile Co. gained 1.5 percent after an industry official said vehicle sales will probably accelerate.

About four stocks dropped for every three that rose on the Shanghai Composite Index (SHCOMP), which added 0.1 percent to 2,128.77 at the close. The measure lost 1.8 percent this week, capping a sixth weekly decline. The CSI 300 Index (SHSZ300) added 0.1 percent to 2,349.11. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, gained 1.9 percent yesterday in New York.

“We had expected company earnings to be bad but it seems that they are going to be even worse than expected, so that could possibly drag on the market,” said Larry Wan, Beijing- based head of investment at Union Life Asset Management Co., which manages the equivalent of $2.2 billion. “Draghi’s pledge will definitely boost sentiment, but deep inside, Chinese investors have accepted the fact that the Europe crisis will not be resolved overnight,”

Thirty-day volatility in the Shanghai index was at 14.1 today, the lowest since June 1. About 5.3 billion shares changed hands in the gauge yesterday, 30 percent lower than the average this year.

Falling Industrial Profit

The Shanghai Composite has fallen 13 percent from this year’s high on March 2 amid concern the economic slowdown and Europe’s debt crisis are curbing earnings growth. The gauge is valued at 9.5 times estimated profit, compared with the three- year average of 14.7.

Sinohydro, the nation’s biggest builder of dams, fell 1.5 percent to 3.96 yuan. Xinjiang Ba Yi Steel lost 1.5 percent to 5.92 yuan. Citic Heavy Industries Co. (601608), the heavy machinery unit of China’s largest conglomerate, slipped 0.6 percent to 4.63 yuan.

Profits for industrial companies fell 1.7 percent from a year earlier in June, declining for a third straight month, the National Bureau of Statistics said on its website today. Earnings in the first six months slid 2.2 percent, it said.

Today’s data underscore the impact on company profits of an economic slowdown that may extend into a seventh quarter, increasing pressure on Premier Wen Jiabao to roll out additional stimulus.

Drug Price Cuts

The People’s Bank of China has cut interest rates twice since early June and lowered lenders’ reserve requirement ratio three times starting in November as part of the government’s efforts to boost credit and support economic expansion.

A measure of 23 health-care stocks in the CSI 300 fell 2.3 percent, the biggest drop among 10 industry groups. It trimmed its gains to 5.3 percent this year.

Huadong Medicine lost 2.5 percent to 31.85 yuan. Yunnan Baiyao Group Co. (000538), a manufacturer of traditional Chinese medicine, slid 2.9 percent to 58.80 yuan. Beijing Tongrentang Co. tumbled 4 percent to 17.15 yuan.

The National Development and Reform Commission may announce a new round of price cuts of more than 20 percent on some medicine soon, including drugs for cancer and blood diseases, the China Securities Journal reported today, citing an unidentified person.

The ECB’s Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc. The ECB mothballed its bond-buying program in March as it pushed governments to do more to control their deficits.

Automakers Gain

Europe is China’s largest export market, making up 18 percent of the nation’s overseas sales, according to Shenyin & Wanguo Securities Co.

Changan Automobile (000625), the Chinese partner of Ford Motor Co. and Mazda Motor Corp., climbed 1.5 percent to 5.26 yuan. Great Wall Motor Co., China’s biggest pickup truck maker, gained 0.9 percent to 16.23 yuan.

Wholesale vehicle deliveries may rise 11 percent to 16.09 million units this year, Shi Jianhua, deputy secretary general of the China Association of Automobile Manufacturers, said at a forum in Beijing yesterday.

“There’s definitely expectations for a reserve-ratio requirement cut after industrial companies’ profit declined again,” said Zhang Yanbin, an analyst with Zheshang Securities Co. in Shanghai. “It’s difficult to turn the market around as the economy remains weak and there’s a lack of confidence by investors. Banks are strong today and yet the market is only up a little, this shows how weak confidence is.”

Industrial & Commercial Bank of China (601398) Ltd., the nation’s biggest lender, rose 1.4 percent to 3.72 yuan. Industrial Bank Co., part-owned by a unit of HSBC Holdings Plc, jumped 2.4 percent to 12.18 yuan.

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