June 5 (Bloomberg) -- China’s stocks fell for a second day, paring a weekly advance, as financial companies declined on speculation this year’s rally has priced in prospects for earnings recovery.

Gemdale Corp., the country’s fourth-largest developer by market value, retreated 1.6 percent after almost tripling this year. Haitong Securities Co. dropped 2.3 percent as the stock traded near its priciest level in a year. Liquor maker Sichuan Swellfun Co. gained 6.8 percent after Diageo Plc boosted its stake in the parent.

“Stocks are expensive so the rally needs a pause,” said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million in assets.

The Shanghai Composite Index, tracking the bigger of China’s exchanges, retreated 13.35, or 0.5 percent, to 2,753.89 at the close. The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, lost 0.5 percent to 2,939.31.

The Shanghai gauge advanced 4.6 percent this week, its fifth weekly gain in six, on signs the economy is recovering. Manufacturing grew for a third month, government data showed June 1, triggering a 3.4 percent gain on the equity index.

Still, the government said yesterday unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump.

Gemdale fell 1.6 percent to 14.40 yuan, trimming the stock’s annual advance to 188 percent. China Vanke Co., the nation’s biggest listed property developer, declined 1.6 percent to 10.69 yuan, snapping a five-day, 12 percent rally. Poly Real Estate Group Co., the No. 2, lost 1.1 percent to 24.55 yuan.

Stimulus Spending

The China Se Shang Property Index of 24 real estate companies has more than doubled in 2009, helping the Shanghai Composite Index to post a 51 percent gain. Stocks have rallied on speculation Premier Wen Jiabao’s 4 trillion yuan ($586 billion) stimulus spending will revive growth in the world’s third-largest economy, which expanded at the weakest pace in almost 10 years in the first quarter.

The Shanghai index traded at 28 times the earnings of its 896 companies this week, the most expensive since May 2008. The gauge is still down 59 percent from its October 2007 peak.

“I am worried that investors will get hit when companies announce half-year earnings in the months ahead,” said Zhang Xiuqi, a strategist at Guotai Junan Securities Co. in Shanghai. “Some results won’t be as good as expected.”

Haitong Securities, the country’s second-largest listed brokerage by market value, fell 2.3 percent to 15.33 yuan. The stock traded at 40.1 times earnings yesterday, the most since June 2008 and almost four times the low of 10.8 times in December.

Diageo Investment

Sichuan Swellfun gained 6.8 percent to 15.18 yuan, the most since Feb. 3, after saying Diageo will invest an additional $15 million in its parent company, Sichuan Chengdu Quanxing Co. Diageo is the world’s largest liquor maker.

Kweichow Moutai Co., China’s biggest producer of baijiu or “white liquor” by market value, surged 5.7 percent to 126.06 yuan. That’s its largest gain in three months. Shanxi Xinghuacun Fen Wine Factory Co., which makes baijiu and wine, added 5.3 percent to 21.03 yuan.

“The Swellfun news has boosted market expectations that there will be more restructuring of medium-end liquor makers,” said Li Hui, an analyst at Southwest China Securities Co. inBeijing. She rates the company’s shares “hold.”

The following companies were among the most active in China’s markets. Stock symbols are in brackets after companies’ names.

Beijing Shougang Co. (000959 CH), China’s only Beijing- based steelmaker, retreated 3.3 percent to 5.30 yuan. The company said sales in 2009 will drop 31 percent to 16.5 billion yuan.

Guangxi Guiguan Electric Power Co. (600236 CH) slid 6.9 percent to 8.74 yuan as it resumed trading today for the first time since May 5. The company said it plans to swap shares for a 70 percent stake in a power plant owned by its parent.

Shenzhen Catic Real Estate Co. (000043 CH) jumped the 10 percent daily cap to 12.52 yuan as it traded for the first time since May 6. The company said it will raise 2.2 billion yuan through the placement of as many as 260 million shares at 8.94 yuan each.

Silver Plaza Group Co. (600858 CH), an operator of department stores, surged the maximum 10 percent to 18.83 yuan. The stock had its recommendation upgraded to “buy” from “outperform” at Shenyin & Wanguo Securities Co., which said an economic recovery will boost consumer spending while the company’s new property projects will add to revenue.

--Zhang Shidong. Editors: Richard Frost, Linus Chua

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-7014 or szhang5@bloomberg.net

Last Updated: June 5, 2009 04:11 EDT