Oct. 25 (Bloomberg) -- China's stock index posted its biggest drop in six weeks as the country's economy expanded more than 11 percent for a third straight quarter, fueling concern borrowing costs will rise to rein in growth.

China Merchants Bank Co. and Baoshan Iron & Steel Co. led declines among the nation's most valuable companies. About 50 stocks among the benchmark CSI 300 Index, including Daqin Railway Co., tumbled by the 10 percent daily limit.

``This reinforces the market's belief that interest rates will be raised soon,'' said Tony Zheng, who manages the equivalent of $790 million at Bank of Communications Schroders Fund Management Co. in Shanghai. ``Stocks are hurting because the tightening may slow corporate earnings growth for the rest of the year.''

Billionaire Warren Buffett said investors should be ``cautious'' about the country's shares. He made the comments while visiting a subsidiary of his Berkshire Hathaway Inc. in northern China yesterday.

The CSI 300, which tracks yuan-denominated A shares listed on China's two exchanges, declined 254.22, or 4.6 percent, to 5,333.79 at the close, the biggest slide since Sept. 11. It was the biggest fluctuation among equity markets included in global benchmarks. Among the measure's 300 members, 266 fell. All 10 of the benchmark's industry groups dropped.

Merchants, Huaneng Power

Merchants Bank, the nation's biggest dual-currency credit- card issuer, lost 1.16 yuan, or 2.7 percent, to 41.80. Baoshan Steel, China's biggest steelmaker, fell 1.09 yuan, or 5.9 percent, to 17.54. Huaneng Power International Inc., the listed unit of China's largest power group, retreated 1.40 yuan, or 9.1 percent, to 13.99.

Gross domestic product rose 11.5 percent from a year earlier, the statistics bureau said today, matching the median estimate of 26 economists surveyed by Bloomberg News. The economy's 11.9 percent expansion in the second quarter was the fastest pace in 12 years. It grew 11.1 percent in the first three months.

Higher interest rates damp corporate earnings by raising companies' borrowing costs.

Central bank governor Zhou Xiaochuan said last week that steeper or more frequent interest-rate increases are possible and expressed concern at rising asset prices.

The central bank has raised interest rates five times this year to prevent an asset bubble, pushing the benchmark one-year lending rate to a nine-year high of 7.29 percent. This month it told lenders to set aside 13 percent of deposits as reserves, compared with a 9 percent requirement at the start of the year.

Rate Increase?

China Petroleum & Chemical Corp., Asia's biggest oil refiner, also known as Sinopec, slid 1.74 yuan, or 6.7 percent, to 24.26. China United Telecommunications Corp., which controls the nation's second-largest mobile-phone operator, retreated 0.66 yuan, or 6.3 percent, to 9.81. Aluminum Corp. of China Ltd., the nation's biggest maker of the lightweight metal, dropped 2.79 yuan, or 5.6 percent, to 47.10.

``The central bank may raise interest rates immediately,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ``We expect the yuan to appreciate more quickly over the next three months as part of measures to cool the economy.''

Daqin Railway, the operator of China's biggest coal transport network, slumped 2.31 yuan, or 10 percent, to 20.77. Maanshan Iron & Steel Co., one of China's biggest producers of construction steel, tumbled 1.09 yuan, or 10 percent, to 9.78. FAW Car Co., a Chinese partner of Mazda Motor Corp., plunged 2.21 yuan, or 10 percent, to 19.89.

Cautious

Buffett this month said his Berkshire Hathaway Inc. sold its stake in PetroChina Co., which has risen more than 70 percent this year to become the world's second-biggest company by market value.

``We never buy stocks when we see prices soaring,'' said Buffett in China's northeast city of Dalian yesterday. ``We buy stocks because we're confident of the company's growth. People should be cautious when they see prices rising.''

The CSI 300 has risen 173 percent in U.S. dollar terms in 2007, the biggest increase among 91 stock benchmarks tracked by Bloomberg. The measure is valued at 51 times reported earnings, the most expensive in the Asia-Pacific region.

The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, fell 4.8 percent to 5,562.39. The Shenzhen Composite Index lost 5.4 percent to 1,374.12.

The following stocks rose or fell and the stock symbols are in brackets after companies' names.

Bank of Nanjing Co. (601009 CH), the Chinese lender partly owned by BNP Paribas SA, added 0.04 yuan, or 0.2 percent, to 19.05. Bank of Nanjing said it booked third-quarter profit of 297.6 million yuan ($39.7 million) as it increased lending to small companies. The bank, which sold shares publicly for the first time in July, didn't give comparative figures.

China Southern Airlines Co. (600029 CH), the nation's biggest carrier, climbed 0.13 yuan, or 0.6 percent, to 21. The carrier boosted third-quarter profit 49 percent from a year earlier to 1.88 billion yuan on a stronger yuan and rising ticket sales.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

Last Updated: October 25, 2007 05:40 EDT