China's Stocks Drop to Two-Week Low on Global Slowdown, Inflation Outlook

China’s stocks fell to the lowest in two weeks and the currency weakened on concern the slowdown in the U.S. and Chinese economies will derail the global recovery.

Jiangxi Copper Co. and Aluminum Corp. of China Ltd. slid at least 2.5 percent on concern about falling demand for metals. China Citic Bank Corp., the banking unit of the nation’s largest investment firm, declined to the lowest in a month after it announced a rights offer to replenish capital, adding to concerns increased shares will divert money from existing banking stocks.

“There’s uncertainty over the global and the domestic recoveries,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The correction on the market isn’t over yet and the index may drop to a lower level on weaker sentiment.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, lost 32.02, or 1.2 percent, to 2,575.48 at the 3 p.m. close, the lowest since July 27. The CSI 300 Index fell 1.2 percent to 2,816.39.

China’s economic growth is slowing and inflation is accelerating, according to reports this week. Data released two days ago indicated import demand slowed more than estimated, while yesterday’s reports showed industrial output rose by the smallest amount in 11 months, retail sales growth eased and new loans climbed less than expected.

The yuan fell the most in seven weeks on speculation policy makers will counter appreciation amid signs of the slowdown in the world’s third-largest economy. The People’s Bank of China today lowered its daily reference rate by 0.36 percent to 6.8015 per dollar, the steepest drop since a dollar peg was scrapped in July 2005, after a gauge of the greenback’s strength jumped the most since 2008.

Inflation Outlook

Reports yesterday also showed that inflation quickened to 3.3 percent in July, the fastest in 21 months, boosted by a low year-earlier base for comparison and rising food costs.

The odds that the Chinese government will ease its tightening policies have fallen given the inflation outlook, according to Deutsche Bank AG economist Jun Ma.

“The hawkish camp is gaining an upper hand in the on-going policy debate for now and the probability of near-term policy easing has declined -- rather than increased -- despite the worsening economic numbers,” Ma wrote. “The rising CPI inflation trend also lends additional support to this view.”

The Shanghai index has advanced 9 percent from this year’s low on July 5 as investors speculated the government would ease property curbs and allow more lending to counter slowing growth. That’s pared 2010 losses to 21 percent, after the government increased down payment requirements on home sales and ordered banks to set aside more deposits as reserves.

Commodities Drop

Gauges of energy and material stocks were among the biggest decliners in the CSI 300 Index today.

Jiangxi Copper, China’s biggest producer of the metal, retreated 2.5 percent to 27.74 yuan. Aluminum Corp. of China Ltd., the listed unit of nation’s biggest maker of the lightweight metal, slid 2.6 percent to 10.14 yuan. Western Mining Co., China’s fourth-largest maker of zinc concentrate, retreated 2.4 percent to 10.69 yuan.

The London Metal Exchange Index of six metals including copper and zinc lost 1.7 percent yesterday, the lowest since July 29. Crude oil for September delivery dropped 2.8 percent to $78.02 a barrel, the lowest settlement since July 28.

In the U.S., the Standard & Poor’s 500 Index dropped 2.8 percent yesterday in New York, the most since July 16, after the Federal Reserve said on Aug. 10 that the U.S. economic recovery is slowing and needs fresh stimulus.

China may start raising interest rates from the fourth quarter because of accelerating inflation, large wage increases and “loose” liquidity conditions, according to RBC Capital Markets.

Banks Drop

“We expect China to join the regional trend in favour of gradual policy normalisation sometime soon, forecasting an initial rate hike in Q4,” RBC analysts wrote in a note.

Citic Bank paced declines for banks, sliding 1.7 percent to 5.64 yuan, the lowest since July 16. It plans to raise as much as 26 billion yuan ($3.8 billion) in a rights offer to strengthen capital and support growth.

Lenders, including Citic Bank, have announced plans to raise more than $84 billion from equity sales since the beginning of the year after a lending spree in 2009 to spur the nation’s economic rebound from the global financial crisis drained their capital. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, fell 1.7 percent to 4.12 yuan.

China Vanke Co. led declines among some developers on the outlook for housing demand. Vanke, the nation’s biggest listed property developer, rose 1.7 percent to 8.46 yuan. China Merchants Property Development Co. advanced 3.1 percent to 19.42 yuan.

Developers Gain

“I don’t think there will be further measures aimed at cracking down on the real estate industry,” said Shen Aiqin, a property analyst at GF Securities Co. in Guangzhou. “China’s housing demand is still there. We expect sales volumes will start to pick up soon with some slight drop in prices.”

Consumer staples producers climbed on the prospect recent floods may boost food prices, increasing profit. They are are also considered defensive companies whose earnings are more resilient in a slowdown.

Kweichow Moutai Co., China’s biggest producer of baijiu liquor by market value, rose 0.7 percent to 148.92 yuan after saying first-half profit rose 11 percent from a year earlier. Wuliangye Yibin Co., China’s second-biggest maker of white liquor by market value, climbed 0.7 percent to 29.78 yuan.

Bin Hu, Chief Executive Officer of BNY Mellon Western Fund Management Co., said he expects consumer and health-care stocks to outperform given the government’s plan to offset a slowdown in exports through increased investment in domestic consumption and other areas that have been neglected. “The key issues are real estate and structural change,” he said.

Foshan Plastics Group Co. slumped 4.8 percent to 12.23 yuan, the most since July 1, after the company said it shut a subsidiary that produces disposable meal containers allegedly with recycled ingredients. China’s state television reported that the boxes were made with recycled garbage and violated hygiene regulations.

--Zhang Shidong. Editor: 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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