China's Stocks Drop on Concern Government is Increasing Tightening Steps

China’s stocks declined for the first time in three days on concern the government is extending its tightening measures from the property industry to commodities to curb overcapacity.

Baoshan Iron & Steel Co. and Zhuzhou Smelter Group Co. slid at least 2 percent after the government said it will remove export tax rebates on some steel and metals products. Poly Real Estate Group Co. and Industrial & Commercial Bank of China Ltd. paced declines for property developers and banks after investor Mark Mobius said stocks haven’t become more attractive after the central bank changed its currency policy. UFIDA Software Co. led gains among software companies on the prospect the government will boost development of the industry.

“The tightening measures that have already been put in place aren’t likely to reversed or eased in the short term,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “There’s already a consensus view among investors that economic growth has peaked.”

The Shanghai Composite Index fell 18.83, or 0.7 percent, to close at 2,569.87. The gauge has plunged 22 percent this year, the world’s third-worst performer, on concern government measures to rein in housing prices and the European debt crisis will damp economic growth. The CSI 300 Index lost 0.9 percent to 2,758.50 today.

China’s central bank has ordered a larger proportion of deposits as reserves at lenders three times this year after unprecedented 9.59 trillion ($1.41 trillion) of new loans fueled an 80 percent gain in stocks in 2009 and a surge in housing prices. The government has also raised down payments and mortgage rates for purchases of multiple-homes to tame property prices that increased a record 12.8 percent in April.

Mark Mobius

The Shanghai Composite rose in the previous two days after the central bank said it will make the nation’s currency more flexible, boosting speculation the yuan will strengthen and reducing the need for interest-rate increases to tame inflation.

China’s stocks “have not become more attractive generally” after the central bank’s announcement, said Mobius, who oversees about $34 billion in emerging markets as Templeton Asset Management’s Singapore-based chairman, in e-mailed comments. “The yuan appreciation will not have a dramatic impact since the exchange rate change is not expected to be significant given the change will be gradual.”

Industrial & Commercial Bank of China, the nation’s biggest listed lender, dropped 0.7 percent to 4.24 yuan. Poly Real Estate, China’s second-largest developer by market value, fell 1.5 percent to 11.65 yuan.

Gauges of energy and materials stocks slid 1.9 percent and 1.7 percent respectively today, the most among the 10 industry groups in the CSI 300.

Metal Rebates

Export tax rebates on hot-rolled coil, some cold-rolled coil and galvanized products will be removed, the Ministry of Finance said in a statement yesterday. The new policy will also affect some zinc and tin products such as pipes, foils, plates and rods, the statement said. The new rates will take effect from July 15, the ministry said.

“The government is using the taxation means to curb expansion in domestic industrial output,” said Wei Wei, an analyst at West China Securities Co. in Shanghai.

Zhuzhou Smelter, China’s biggest producer of refined zinc, slid 2 percent to 10.16 yuan. Jiangxi Copper Co., the nation’s biggest producer of the metal, lost 1.6 percent to 27.83 yuan. Tongling Nonferrous Metals Group Co., the second-biggest copper producer, fell 1.6 percent to 16.28 yuan.

Export Rebates

China’s plan to remove export tax rebates on some products shows that the government remains confident on the strength of the nation’s economy and will push forward with tightening measures, Bank of America-Merrill Lynch said in a report today.

Goldman Sachs Group Inc. lowered its 12-month share-price estimates for four Chinese steelmakers by as much as 32 percent to factor in the brokerage’s steel and iron ore price forecasts.

The brokerage cut 2010 and 2011 earnings estimates for Angang Steel Co., Baoshan Steel, Maanshan Iron and Steel Co. and Wuhan Iron & Steel Co. by as much as 59 percent, analysts led by Jim Hung wrote in a report.

Baoshan Steel, the listed unit of China’s second-biggest steelmaker, fell 2.7 percent to 6.08 yuan. Hebei Iron & Steel Co., the listed unit of China’s biggest steelmaker, lost 1.7 percent to 3.97 yuan.

China will expand outsourcing in the software and information services industries through measures such as providing beneficial policies, Xinhua News Agency reported yesterday, citing unidentified officials with the Ministry of Commerce.

‘Turning Bullish’

UFIDA Software, which makes financial software, advanced 3.9 percent to 23.25 yuan, the biggest gain since June 7. China National Software & Service Co. jumped 5.8 percent to 24.10 yuan, while Shandong Langchao Cheeloosoft Co. surged the 10 percent daily limit to 14.18 yuan.

Nomura Holdings Inc. is turning “bullish” on China’s yuan-denominated shares for the first time this year amid signs of improvement.

“A number of liquidity indicators are close to turning,” analysts led by Sean Darby wrote in a report today. “Changes in the yuan’s peg to the U.S. dollar, large cash holdings of domestic fund managers and improving risk appetite are sufficient catalysts to turn around performance in the short term.”

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

Anhui Conch Cement Co. (600585 CH), China’s biggest cement maker, dropped 1.6 percent to 17.71 yuan. The company had its Hong Kong-traded stocks rating cut to “hold” from “buy” by BNP Paribas analysts Bruce Wang and Fannie Cui.

Hualan Biological Engineering Inc. (002007 CH) jumped 7.1 percent to 48.29 yuan, the biggest advance since April 20, after the Chinese drugmaker said one of its units received approval from the Chinese government to make a hepatitis B vaccine.

Jiangxi Wannianqing Cement Co. (000789 CH) surged the maximum 10 percent to 8.20 yuan on the prospect that rebuilding after floods in the country’s south will increase demand.

“The basic business hasn’t changed much, but the prospect of reconstruction demand attracts attention,” Chu Jie, an analyst with Guoyuan Securities Co., said in a phone interview.

--Zhang Shidong. 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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