China's Stocks Drop After Shenyin Downgrades Steelmakers; Drugmakers Fall

China’s stocks fell on Shenyin & Wanguo Securities Co.’s downgrade of the steel industry and concern health-care companies may be overvalued given their earnings outlook.

Baoshan Iron & Steel Co. and Hebei Iron & Steel Co. dropped at least 1 percent after Shenyin & Wanguo said steelmakers’ profit margins may narrow. Jiangsu Hengrui Medicine Co. led a decline among health-care stocks, the second-best performer in the CSI 300 in 2010. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. added at least 0.4 percent after Citic Securities Co. said the central bank may adopt a more relaxed monetary policy to ease a shortage of cash at banks.

“A slowing of economic and corporate earnings growth in the third quarter looks certain as a result of tightening measures,” said Zheng Tuo, president of Shanghai Good Hope Equity Investment Management Co. “Some of the slowdown may have already been priced into equities and there’s a big possibility of a double-dip for the economy.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 9.70, or 0.4 percent, to 2,560.25 at the close. The CSI 300 Index lost 0.6 percent to 2,742.73. China’s markets were shut from June 14 to yesterday for the holidays.

The Shanghai gauge has dropped 22 percent this year on concern government measures to rein in housing prices and the European crisis will damp economic growth.

China’s steelmaking industry was lowered to “neutral” from “overweight” by Shenyin & Wanguo analyst Zhao Xiange. Major steelmakers will have “slim” profit margins in the third quarter and the outlook for iron ore negotiations isn’t optimistic, Zhao said in a report today.

Price Increases

Baoshan Steel, the listed unit of China’s second-biggest steelmaker, dropped 1 percent to 6.07 yuan. Baosteel Group Corp., the second-biggest steelmaker, agreed to accept a 23 percent increase in iron ore prices from Rio Tinto Group and BHP Billiton Ltd., said research company UC361.com.

Hebei Iron & Steel Co., the listed unit of the biggest steelmaker, fell 1.2 percent to 4.02 yuan. Maanshan Iron & Steel Co. slid 1.2 percent to 3.42 yuan.

Jiangsu Hengrui Medicine paced declines for drugmakers, sliding 8 percent to 45.09 yuan and trimming its gain to 3.1 percent this year. Harbin Pharmaceutical Group Co. tumbled 8.9 percent to 20.23 yuan, its biggest loss since September 2008.

A measure tracking health-care stocks slid 5.8 percent today, the most among the 10 industry groups of the CSI 300. It had advanced 9.3 percent in 2010 as of the end of last week.

Drugmakers Earnings [bn:PRSN=1]

Liu Xiaoming [], an analyst at Guoyuan Securities Co., said investors were selling drugmakers after recent rallies pushed reported price earnings for the industry measure to 25 times, compared with 18 for the CSI 300.

Per-share earnings at Chinese health-care companies are expected to grow 23 percent this year, compared with 29 percent for companies trading on the Shanghai Stock Exchange, according to Macquarie Group Ltd.

A leading indicator for China jumped by the most in 14 months, adding to signs that the world’s third-biggest economy is maintaining momentum as Europe’s debt crisis threatens to undermine the global recovery. The measure gained 1.7 percent to 147.1 in April, compared with a revised 1.2 percent increase in March, The Conference Board said on its website on June 15.

“There have been so many increases in the reserve requirement ratio this year that even big banks are short of cash,” said Hu Hangyu, a Beijing-based fixed-income analyst at Citic. “The central bank may make monetary policy a bit loose to guide the repo rates lower to a reasonable level.”

Banks Gain

Industrial & Commercial Bank of China, the nation’s biggest listed lender, added 1.4 percent to 4.23 yuan. Construction Bank, the second-largest, rose 0.4 percent to 4.82 yuan.

The seven-day repurchase rate climbed past the one-year deposit rate on May 27 and has remained there on all aside from four days since. The last time this occurred, in February, it lasted just two days. Fund shortages worsened after policy makers raised banks’ reserve requirements three times this year and drained cash from the financial system through bill sales.

Chinese stocks may gain 15 percent in the “coming months” as concerns ease over an oversupply of shares and the economy withstands Europe’s sovereign debt crisis, according to HSBC Holdings Plc’s China strategist Steven Sun.

“Now is the time to look for 10 to 15 percent rebound in the coming months” as banks cut the amount of capital they planned to raise, Sun, Hong Kong-based equity strategist at HSBC, said in a Bloomberg Television interview. “The Chinese economy should continue to grow 9 percent in the second half. We’re not forecasting a double-dip scenario, given the still robust exports and imports numbers, and also resilient consumption.”

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

Citichamp Dartong Co. (600067 CH) rose 3.8 percent to 9.01 yuan after the company said it canceled plans for a rights offer due to changes in the Chinese real estate market.

Meidu Holdings Co. (600175 CH), a Chinese property developer and manager of hotels, plunged by the 10 percent daily limit to 4.55 yuan after 376 million of its shares become tradable today.

Shanxi Sanwei Group Co. (000755 CH), a manufacturer of chemical products, added 1.2 percent to 7.77 yuan after saying it will invest 102 million yuan for a 51 percent stake in a venture that will produce coking-related products.

--Zhang Shidong. With assistance from Patricia Lui, Shiyin Chen, Chua Kong Ho and Diao Ying. Editors: Allen Wan, Richard Frost

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

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