Shanghai Stocks Drop for First Time in 7 Days, Led by Banks, Coal Shares

China’s stocks dropped for the first time in seven days on concern about rising credit risks at banks and speculation recent gains for commodity producers were excessive given prospects for slowing economic growth.

Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, retreated 1.2 percent on concern banks may curb lending to local governments. China Shenhua Energy Co. and China Coal Energy Co., the nation’s top two coal producers, slid after prices for the fuel lost the most in four months. Jiangxi Copper Co. dropped the most in two weeks, pacing declines for stocks that are dependent on economic growth.

“The domestic economy isn’t reassuring as the slowdown has just begun and it remains unknown if the government will relax tightening as expected,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 13.31, or 0.5 percent, to 2,575.37 at the 3 p.m. close. The CSI 300 Index slid 0.6 percent to 2,795.72.

The Shanghai index had advanced 6.8 percent over the past six days, the longest streak since November, on expectations the government will relax property curbs and allow more bank lending to counter a slowdown in economic growth. The gauge has fallen 21 percent this year on speculation measures to control real- estate speculation and rising consumer prices will damp earnings.

There are concerns Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local infrastructure projects, according to a person with knowledge of data collected by the China Banking Regulatory Commission. China this year restricted borrowing on concern money isn’t being used for viable projects.

Loan Defaults

Dagong Global Credit Rating Co. expects defaults on these bank loans, chairman Guan Jianzhong said yesterday. There won’t be a systemic risk to the banking system as regulation has improved, he said.

Credit ratings assigned to yuan-denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, he said.

ICBC, the nation’s biggest listed lender, fell 1.2 percent to 4.28 yuan. Bank of China Ltd. dropped 0.3 percent to 3.55 yuan. China Merchants Bank Co. lost 1.1 percent to 14.11 yuan.

Coal Slump

Qinhuangdao coal prices, a Chinese benchmark, fell the most in four months. The price of coal dropped 1.3 percent to between 740 yuan and 750 yuan a metric ton as of yesterday compared with a week earlier, according to data from the China Coal Transport and Distribution Association. That’s the biggest decline since a 1.5 percent drop in the week to March 15.

Shenhua, the nation’s largest coal producer, dropped 1.2 percent to 22.87 yuan. China Coal, the second largest, slid 0.9 percent to 9.30 yuan. Datong Coal Industry Co., the third largest, retreated 3.1 percent to 16.16 yuan.

Jiangxi Copper, China’s biggest producer of the metal, lost 2 percent to 28.52 yuan. The stock advanced 16 percent over the past six days. Zhuzhou Smelter Group Co., the largest producer of refined zinc, fell 2.2 percent to 9.69 yuan. Huludao Zinc Industry Co., the second largest, lost 1.6 percent to 6.66 yuan.

China’s stock market, the worst performer in Asia this year, is “near the bottom” and may rally as much as 14 percent as policy tightening concerns ease amid slowing economic growth, according to Citigroup Inc.

Turbulent Market

The Shanghai A-Share Stock Price Index, which rose 0.7 percent to 2,713.20 yesterday, will probably reach 2,800 to 3,100 before the end of the year, outperforming gains in Hong Kong-traded Chinese stocks, analyst Minggao Shen wrote in a report. Still, the market may be “mixed” in the near term before being spurred by a “liquidity rally,” he said.

“Policy headwinds that had caused turbulence in the market are finally settling, along with downward trending economic growth,” wrote Shen.

China will maintain stability in its economic policies in the second half of the year, Premier Wen Jiabao said in a speech in Beijing July 16. UBS AG economist Tao Wang said in a report the speech signaled a “subtle shift” in government policies and that no additional tightening measures will be introduced.

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

Anhui Golden Seed Winery Co. (600199 CH) climbed 6.1 percent to 14.17 yuan after saying first-half net income jumped 177 percent from a year earlier.

Beijing Hualian Hypermarket Co. (600361 CH) soared by the 10 percent daily cap to 9.31 yuan. The company said it plans to raise 1.3 billion yuan from a private sale of shares to fund the opening of 39 new stores.

GD Power Development Co. (600795 CH), the largest electricity producer in northeastern China, lost 1.7 percent to 3.51 yuan after saying that first-half profit fell 7.5 percent from a year earlier.

Jiangzhong Pharmaceutical Co. (600750 CH) added 1.3 percent to 33.09 yuan after the company said first-half profit rose 33 percent from a year ago.

S&P Pharmaceutical Industry Co. (600869 CH) surged by the 10 percent daily limit to 16.38 yuan after the securities regulator approved its plan to buy assets using its shares.

Tsingtao Brewery Co. (600600 CH), China’s second-biggest brewery by volume, gained 4.2 percent to 34.63 yuan after Asahi Breweries Ltd. agreed to produce its beer in China. Beijing Asahi, a unit of Japan’s second-largest brewer, will produce Tsingtao Beer products for the Chinese beermaker.

--Zhang Shidong. Editors: Allen Wan, Linus Chua

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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