China's Small-Cap Stocks Decline Most Since January as Loan Growth Slows

China’s smaller-company stocks fell the most in almost three months on concern that a slowdown in new lending will hurt their availability of capital more than their larger rivals.

The CSI Smallcap 500 Index dropped 3.1 percent to 4,822.22 at 11:30 a.m. local time. It earlier fell as much as 3.7 percent to 4,793.28, the most since Jan. 26. The measure had gained 11 percent this year before today’s decline, compared with a 6.3 percent drop for the broader CSI 300 Index and a 4.5 percent drop for the Shanghai Composite Index.

Chinese banks extended a less-than-estimated 510.7 billion yuan ($74.8 billion) of new loans in March, down from 700 billion yuan in February and the median forecast of 709 billion yuan in a Bloomberg News survey of 21 economists. The central bank released the latest data on its Web site yesterday.

“From the new lending figures, liquidity is becoming tighter for the market and the government is expected to still keep tight monetary policies in place for the rest of the year,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Small-cap stocks bear the brunt of that with valuations reaching too high a level. Very few companies’ profit can grow enough to justify current prices.”

China’s CSI 500 Index of companies with a median market value of $841 million has extended last year’s 131 percent rally on the prospect record-low interest rates, a $586 billion stimulus program and $1.6 trillion of state-directed lending would boost profits at the fastest-growing companies. The Shanghai Composite rose 80 percent in 2009.

Valuations

The small-cap index trades at 56.8 times reported earnings, compared with a multiple of 28.2 on the CSI 300 and 27.7 on the Shanghai Composite.

Regional stocks have rallied this year on the prospect the government is boosting investment in the poorer western region after riots in Tibet and Xinjiang last year left hundreds dead. Xinjiang Urban Construction Co. slumped 4.4 percent to 13.6 yuan after rising 64 percent this year. Tibet Shengdi Ltd., a tour operator, lost 4.3 percent after surging 35 percent.

Changyuan Group Ltd., which makes power cables and heat- shrinkable materials, plunged the most on the CSI 500 Index today after reaching an almost three-year high this week. The stock lost 8.5 percent to 35.12 yuan.

“There’s very limited room for small-cap stock valuations to rise further,” Ally Wang, who helps oversee about $1.2 billion at HSBC Jintrust in Shanghai, said in February. “Earnings growth prospects have been priced in.”

Chinese banks extended fewer new loans in March after the central bank told lenders to set aside bigger reserves and pace credit growth.

Banks’ first-quarter new lending was 35 percent of the government’s full-year target of 7.5 trillion yuan. March lending was down from a monthly record of 1.89 trillion yuan a year earlier. In the first three months of 2009, lending was 48 percent of the year’s total.

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