China’s stocks fell after a report showed foreign direct investment slumped to a two-year low, overshadowing comments from Premier Wen Jiabao that there is more room to adjust monetary policy.
Tsingtao Brewery Co. (600600), China’s second-biggest brewery by volume, slid 4 percent for the biggest decline among consumer staples stocks after earnings missed analysts’ estimates. Huadong Medicine Co. led a drop for health-care shares on speculation drugmakers are overvalued. Wen said that while easing inflation allows more room to alter monetary policy, downward pressure on the economy remained “relatively large.”
“The market is mainly concerned about the economy, which is facing structural problems from shifting to consumption from over-investment,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “Wen’s comment is keeping investors’ hopes alive that more policy easing may come soon.”
The Shanghai Composite Index (SHCOMP) fell 0.3 percent to 2,112.20 at the close, the lowest level since Aug. 2. The CSI 300 Index (SHSZ300) lost 0.5 percent to 2,319.67. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong retreated 0.4 percent today. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, was little changed yesterday.
The Shanghai Composite tumbled 14 percent from this year’s high on March 2 through yesterday amid concern the economic slowdown is worsening. The index is valued at 9.5 times estimated profit, compared with the 17.4 average since Bloomberg began compiling the data in 2006.
Foreign direct investment dropped 8.7 percent in July from a year earlier to $7.58 billion, the lowest level in two years, the Ministry of Commerce said today in Beijing. It’s the eighth drop in nine months and the smallest inflow since July 2010. Inflation slowed to a 30-month low in July, export growth collapsed and new yuan loans trailed estimates.
“The weaker-than-expected economic activity in July imposes more downside risk to our 8 percent growth forecast in third quarter,” Wang Tao, economist at UBS AG, wrote in a note. “More importantly, for investors, earnings growth, which tracks nominal GDP growth more closely, would continue to deteriorate in the third quarter as dropping output prices weaken revenue growth further.”
Tsingtao Brewery slid 4 percent to 33.10 yuan, the biggest loss since Jan. 4. Net income rose 1.8 percent from a year earlier to 1 billion yuan ($157 million) in the six months ended June 30, the company said yesterday. That compares with the 1.13 billion yuan average of four analyst estimates compiled by Bloomberg.
“We have the conditions and capabilities, and will be sure to fulfill this year’s economic and social development targets,” Wen said during a two-day inspection tour to the eastern province of Zhejiang, the official Xinhua News Agency reported yesterday.
The reports yesterday didn’t specify which targets China will meet, including the 7.5 percent goal for gross domestic product growth set in March. Expansion was 7.8 percent in the first half, and Deutsche Bank AG last week lowered its third- quarter forecast to 7.5 percent from 7.9 percent.
Wen’s comments reinforced a view that China will cut lenders’ reserve-ratio requirements this month, Zhang Zhiwei, an economist at Nomura Holdings Inc., wrote in a report today. The likelihood of an interest-rate cut is rising though it’s still less than 50 percent, he said.
A measure of health-care stocks in the CSI 300 fell 1.8 percent today, the biggest drop among the 10 industry groups. Huadong Medicine lost 4.1 percent to 33.11 yuan. Tasly Pharmaceutical Group Co. slid 2.2 percent to 49.68 yuan.
Shandong Dong-E E-Jiao Co. (000423) dropped 4.4 percent to 36.80 yuan. Growth in first-half net income slowed to 3.7 percent from 47 percent a year earlier on rising raw-material costs, the traditional medicine maker said in a statement yesterday.
Drugmakers are “too expensive,” said Mark Mobius, the executive chairman of Templeton Emerging Markets Group, said in an e-mailed response to questions on Aug. 14.
Health-care stocks in the CSI 300 trade at 21 times estimated earnings, twice as expensive as stocks in the Shanghai Composite, according to data compiled by Bloomberg.
The cost of protecting against a drop in Chinese stocks fell to the lowest level in 15 months on speculation China’s central bank will introduce measures to boost economic growth.
Puts with an exercise level 10 percent below the Hang Seng China Enterprises Index cost 1.26 times more than calls betting on a 10 percent rally, according to data on one-month options compiled by Bloomberg. The price relationship known as skew touched 1.13 on Aug. 10, its lowest level since April 2011. The index tracking shares of mainland companies listed in Hong Kong rose 6.7 percent since this year’s low on July 12.
Thirty-day volatility in the Shanghai Composite was at 13.8 today, compared with this year’s average of 17.5, while about 4.4 billion shares changed hands, the lowest since Dec. 26.
--Zhang Shidong. Editors: Allen Wan, Richard Frost
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