China Stocks Fall Most in Six Weeks on Fed Reserve Speculation, Valuations

China’s stocks fell the most in six weeks as commodity and consumer companies dropped on concern recent gains were excessive and speculation the size of a possible U.S. asset-purchase program may disappoint investors.

Jiangxi Copper Co. and PetroChina Co. lost more than 2 percent as the Wall Street Journal reported the Federal Reserve may next week announce a program of U.S. Treasury purchases worth a few hundred billion dollars. Gree Electric Appliances Inc. paced declines for consumer companies. China Vanke Co., the biggest developer, rose 2.6 percent as Citigroup Inc. said property curbs will only have a temporary effect on demand.

“Stocks may be volatile in the near term after such a big run-up,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “Should the Fed not buy as much debt as expected, that’ll cause liquidity worries and money will flow out of asset markets such as equities and commodities.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 44.50, or 1.5 percent, to 2,997.05 at the 3 p.m. close, the biggest decline since Sept. 16. The CSI 300 Index fell 1.8 percent to 3,403.87.

The Shanghai Composite, trading near its highest level since April 16, is valued at 20 times earnings, compared with 17 times in early July, according to weekly data compiled by Bloomberg. Its 14-day relative strength measure, measuring how rapidly prices have advanced or dropped during a specified time period, was at 77.1 yesterday. Readings above 70 indicate a price may be poised to fall.

PetroChina Falls

Jiangxi Copper, China’s biggest producer of the metal, lost 3.8 percent to 45.16 yuan. The stock reached the highest since July 2009 earlier this week. Zijin Mining Group Co., China’s largest gold producer, retreated 4.5 percent to 9.84 yuan, trimming its gain to 35 percent this month.

Copper declined for a second day as the dollar strengthened. Three-month copper reversed an early advance to drop as much as 0.8 percent in London today.

An index tracking energy producers fell 2.9 percent, the most among the CSI 300’s 10 industry groups, after jumping 35 percent this month through yesterday. PetroChina, the nation’s biggest oil producer, lost 2.1 percent to 11.32 yuan after closing at its highest since May 5. Yanzhou Coal Mining Co., the listed unit of China’s fourth-biggest coal miner, slid 2.5 percent to 30.70 yuan. The stock had jumped 72 percent this month through yesterday.

Quantitative Easing

Fed Chairman Ben S. Bernanke said more monetary stimulus may be warranted after $1.7 trillion of debt purchases failed to spur growth. Their first round of quantitative easing, totaling $1.75 trillion, lasted from November 2008 to March 2010. The ultimate size of the asset-purchase program range could reach $2 trillion, according to Goldman Sachs estimates.

The prospect of quantitative easing has spurred gains for commodity producers as increasing the money supply may boost inflation. Investors were buying energy and metal producers as a hedge against a weaker dollar.

A gauge of consumer discretionary stocks fell 2.7 percent today. Gree Electric, China’s largest maker of home air- conditioners, dropped 3.4 percent to 19.12 yuan. The stock closed at a record high yesterday. Tsingtao Brewery Co., China’s second-biggest brewery by volume, lost 1.1 percent to 36.34 yuan.

The Shanghai Composite has gained 13 percent this month, the best performer among the 89 major benchmarks tracked globally by Bloomberg. The gauge is still down 8.5 percent this year after the government raised bank reserve requirements and curbed lending growth to avert asset bubbles.

Economic Growth

This month’s rally in China’s stocks “still has legs” as the nation’s economic growth exceeds expectations, according to Michael Yoshikami, who oversees about $1 billion at YCMNet Advisors. He said this month’s unexpected increase in interest rates reflects confidence among policymakers that the economy can weather higher borrowing costs.

“Yes, China has risks from rates going up but they would not be raising rates” if not for the economy’s strength, Yoshikami said. “China is growing more than people think.”

Bank of America-Merrill Lynch raised its estimate for Chinese economic growth in the fourth quarter to 9.3 percent from 9 percent, according to an e-mailed report distributed today. Merrill Lynch also raised its estimate for annual growth to 10.3 percent from 10.1 percent, according to the report.

Temporary Impact

Vanke, the nation’s biggest listed property developer, climbed 2.6 percent to 9.63 yuan. Poly Real Estate, the second biggest, rose 1.1 percent to 14.79 yuan. China Merchants Property Development Co. advanced 1.1 percent to 19.31 yuan.

China’s measures to curb property speculation will only have a temporary impact on demand given excessive liquidity in the country, the government’s dependence on real estate for revenues and the lack of investment alternatives, according to Citigroup.

Policy makers have grappled this year with record property- price gains after record lending and a 4-trillion yuan ($600 billion) stimulus package pumped up growth during the financial crisis. The government has this year tightened down-payment requirements, suspended loans for third-home purchases, and pledged to speed trials of a property tax.

“We believe current share prices have factored in much of the bad news,” Citigroup analysts led by Oscar Choi wrote in a report. “In our view, policy should not be paid too much attention.”

--Zhang Shidong. Editors: Allen Wan, Richard Frost

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net

To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net

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