China Stocks Drop Most in Three Weeks Amid Bank Loan Restriction Concerns

China’s stocks fell, sending the benchmark index to its biggest drop in three weeks, as investors speculated the government will curb bank lending.

Financial companies led the decline, with Agricultural Bank of China Ltd. sinking below its offer price for the first time since its July debut. A person with knowledge of the matter said the regulator may require the biggest banks to boost capital adequacy ratios to as high as 15 percent by 2012. Jiangxi Copper Co. and China Shenhua Energy Co. retreated after prices of metals and oil fell. Guangzhou Pharmaceutical Co. paced losses by drugmakers on prospects recent gains were overdone.

“Should the 15 percent target be implemented, it’ll hurt liquidity because banks will reduce lending and sell new shares to boost capital,” said Wang Zheng, chief investment officer at Jingxi Investment Management Co. in Shanghai. “The decline in smaller companies such as pharmaceutical stocks is no surprise; current prices have already baked in growth potential for the next couple of years.”

The Shanghai Composite Index slid 50.04, or 1.9 percent, to close at 2,602.47. That’s the biggest loss since Aug. 25. The gauge fell 1.3 percent yesterday amid concern government curbs on the property market and energy consumption will slow growth in the economy and earnings. The CSI 300 Index declined 1.9 percent to 2,857.79.

The Shanghai index has rebounded 10 percent from this year’s low on July 5 on signs the nation’s economic slowdown is stabilizing. The measure plunged 27 percent in the first half after last year’s 80 percent surge as the government imposed tightening measures ranging from restrictions on multi house purchases to a 7.5 trillion yuan ($1.1 trillion) annual limit on new lending by banks.

Banks Retreat

An index tracking financial companies dropped 1.7 percent today and was the biggest contributor to losses on the CSI 300 among the 10 industry groups.

Agricultural Bank, the nation’s third largest lender, lost 1.9 percent to 2.63 yuan, below its offer price of 2.68 yuan. Industrial & Commercial Bank of China Ltd. the nation’s biggest listed lender, declined 1.5 percent to 3.97 yuan. China Construction Bank Corp. the second largest, declined 2 percent to 4.52 yuan, the lowest close since May 2009.

A draft proposal by the banking regulator calls for banks to add a capital adequacy ratio buffer of as much as 4 percent to shield against economic swings, a person with knowledge of the matter said yesterday. The new rules would boost the overall minimum capital adequacy ratio for the largest lenders to as high as 15 percent from 11.5 percent now, the person said.

Basel Requirements

China’s rules would be stricter than capital requirements announced Sept. 12 by the Basel Committee on Banking Supervision in response to the global financial crisis. The country has moved to rein in risk-taking among banks this year after last year’s record $1.4 trillion of new loans fanned concerns about the financial system’s ability to withstand future stress.

The banking regulator has made no new regulatory requirements for capital adequacy ratio for big banks, it said in a text message today. Spokespeople at ICBC, Construction Bank, Bank of China Ltd. and AgriBank -- the country’s four largest lenders -- either declined to comment or weren’t available.

“We believe the countercyclical capital buffer, if it is implemented, will have a profound impact on bank lending growth ahead,” Beijing-based Goldman Sachs Group Inc. analysts Ning Ma and Richard Xu wrote in a note today.

The capital requirement would cut loan growth to 12 percent to 16 percent, a rate that more closely tracks nominal gross domestic product expansion, from 20 percent now as banks try to avoid triggering the “countercyclical” buffer, Ma and Xu said.

Metal Prices

China’s banking regulator is considering imposing a bad loan coverage ratio of 250 percent, compared with 150 percent currently, Caixin Online reported today, citing an unidentified executive at Construction Bank.

A gauge of raw-material producers on the CSI 300 fell 2.3 percent. The London Metal Exchange Index of six metals including copper and zinc declined 0.4 percent yesterday. Crude oil in New York sank 1 percent yesterday and lost as much as 0.9 percent today.

Jiangxi Copper, China’s biggest producer of the metal, dropped 2.6 percent to 31.35 yuan. Aluminum Corp. of China Ltd., the listed unit of the nation’s largest maker of the lightweight metal, sank 2.1 percent to 9.77 yuan, the lowest since July 23. Shenhua, the nation’s largest coal producer, lost 1.5 percent to 22.84 yuan.

China should lower economic growth expectations “moderately,” Xia Bin, an adviser to the People’s Bank of China, said yesterday. The country can’t expect prosperity like that which it experienced from 2003 to 2007, Xia said. The Asian nation needs to improve productivity and set up new industries, Xia said.

Drugmakers Decline

Health-care stocks slumped, with a gauge of drugmakers falling 1.7 percent, amid speculation recent gains were excessive relative to earnings prospects. The index has gained 15 percent this year, the second-best performer among the CSI 300’s 10 industry groups.

Guangzhou Pharmaceutical Co. slid 6.8 percent to 14.59 yuan, the most since June 29 and trimming its gain to 28 percent this year. Yabao Pharmaceutical Group Co. slumped 5.3 percent to 9.65 yuan.

--Zhang Shidong. Editors: Richard Frost, Reinie Booysen

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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