China's Stocks Decline on Banks' Stress Tests, Led by Property Developers

China’s stocks fell on concern that the property market may slump further, reducing the earnings of the nation’s banks, after regulators told lenders to gauge the effect of real-estate prices sliding by as much as 60 percent.

Industrial & Commercial Bank of China Ltd. and Poly Real Estate Group Co. led declines for banks and developers after a person with knowledge of the matter said lenders were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively. Kweichow Moutai Co. surged to the highest in three months on the prospect rising prices will boost the earnings of consumer companies.

“The stress test highlights the government’s concerns about banks’ exposure to the property market,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “It’s a pre-emptive measure by the regulator to prevent risks.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, lost 17.77, or 0.7 percent, to 2,620.76 at the 3 p.m. close. The CSI 300 Index fell 0.9 percent to 2,850.83, led by a 1.8 percent drop for a gauge of banks and developers. A measure of consumer staples rallied 1.9 percent.

The Shanghai index is down 20 percent in 2010, the world’s worst performer globally, on concern measures to control real- estate speculation and accelerating inflation will damp earnings. The index has rebounded 11 percent from this year’s low set on July 5 on speculation the government will ease property curbs and allow more lending to counter a slowdown in economic growth.

No Loosening

“The stress test probably shows the government won’t loosen its curbs on the property market as it’s already prepared for the worst,” said Wei Wei, an analyst at West China Securities Co. in Shanghai.

ICBC, the nation’s biggest lender, dropped 1.4 percent to 4.23 yuan. China Construction Bank Corp., the second largest, lost 1.6 percent to 4.83 yuan. Bank of China Ltd. fell 1.7 percent to 3.49 yuan.

Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent. A deep slump in the property market may further slow the economy, which grew at a less-than-forecast 10.3 percent pace in the second quarter.

Property prices in 70 Chinese cities dropped 0.1 percent in June from the previous month, the statistics bureau said July 12. Prices rose 11.4 percent from a year earlier, the second monthly slowdown after April’s record expansion.

Poly Real Estate, China’s second-largest developer market value, lost 4.5 percent to 12.50 yuan. China Vanke Co., the biggest, fell 3 percent to 7.99 yuan. Gemdale Corp., the fourth largest, slid 2.8 percent to 6.89 yuan.

Bank Lending

China must contain bank lending, keep the yuan’s exchange rate flexible and provide “guidance” for the property market to help ensure “smoother functioning” of the economy, Xia Bin, an adviser to the central bank and director of the Finance Institute at the Development Research Center of the State Council, wrote in a commentary published in today’s China Daily.

The central bank has raised reserve requirements at commercial lenders three times this year after record 9.59 trillion-yuan ($1.4 trillion) new loans last year fuelled a surge in property prices. The government in April raised down payments and mortgage rates for multiple-purchases of homes.

Jesper Madsen, whose Matthews Asia Dividend Fund beat 97 percent of its peers in the past year, said the stress tests were a “welcome exercise” in addressing “potential issues on the loan books.”

Kweichow Moutai advanced 2.9 percent to 148.16 yuan, the highest since April 22. Chongqing Department Store Co. rose 4.2 percent to 49.24 yuan, its highest since it began trading on the Shanghai Stock Exchange in 1996. Dashang Group Co., a department store operator, added 4.3 percent to 46.94 yuan.

Inflation Outlook

The nation’s consumer prices probably rose to 3.3 percent last month, boosted by food prices, Tao Wang, head of China Economic Research at UBS AG, wrote in a note to clients yesterday. The statistics bureau will release July data including consumer prices and industrial productions on Aug. 11.

China’s retail sales are expected to grow between 17 percent and 18 percent this year, analyst Liu Li at Shanghai Securities Co. wrote in a report this week.

“Consumption will play an increasing role in boosting economic growth,” said Liu. “Retailers are facing great opportunities.”

--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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