China Stocks Plunge on Concern Inflation May Spur More Controls

China’s stocks fell, driving the benchmark index to the lowest in a month, on speculation the government will intensify measures to curb accelerating inflation including higher interest rates and price controls.

PetroChina Co. and Jiangxi Copper Co. plunged more than 6 percent on concern further tightening will curb oil and metals demand. China Vanke Co. slid to the lowest since September, pacing declines by real-estate developers, after the government ordered first-time foreign homebuyers to show proof they don’t own other properties. China Construction Bank Corp. and Agricultural Bank of China Ltd. dropped more than 2 percent on the prospect higher borrowing costs will cut loan growth.

“Speculation that the central bank will tighten monetary policy continues to dog the market,” said Wang Cheng, a strategist at Guotai Junan Securities Co. in Shanghai. “The market will be under pressure for the coming three to 12 months from the threat of measures to cool inflation.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, tumbled 119.88, or 4 percent, to 2,894.54 at the close, the lowest since Oct. 14. The index has plunged 8 percent in the biggest loss for a three-day period since Sept. 1 on speculation policymakers may raise rates for the second time in two months to curb gains in consumer prices. The CSI 300 Index slid 4.4 percent to 3,169.54 today. Today’s losses pared the Shanghai index’s quarterly gain to 11 percent as concern the government will limit lending growth and curb fund inflows overshadowed optimism over the economy and earnings.

Central Bank Governor Zhou Xiaochuan said today China is under “pressure” from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years.

Price Controls

“Some emerging economies have grown quickly and face some pressure of capital inflows” as growth in developed nations has slowed, Zhou said. Rising prices in China need attention and officials should “strengthen liquidity management and maintain moderate growth in credit and money supply,” he said.

China will introduce measures to control rising food prices, including limits on how much products may be sold for and subsidies, the China Securities Journal reported, citing an unidentified person. Corn prices in China jumped to a record today and rice also reached an all-time high.

The Ministry of Commerce said it will work with other government agencies to curb inflation. The supply of most goods is sufficient although a few products, including diesel, are in short supply, the ministry said in a statement ahead of a news conference in Beijing. The government is selling pork and sugar from reserves to ensure supply, the ministry said.

Commodity Slump

Gauges of energy and material companies in the CSI 300 Index dropped more than 5 percent. The energy and material stock gauges rallied more than 26 percent last month on speculation the U.S. quantitative easing program would spur inflation and fuel more inflows into emerging markets. China is also the world’s leading consumer of many commodities.

PetroChina, the biggest oil producer, fell 6.5 percent to 11.57 yuan. Jiangxi Copper, the largest metal producer, declined 8.7 percent to 36.32 yuan. Aluminum Corp. of China Ltd. fell 5 percent to 10.78 yuan.

“The energy and materials sectors are particularly susceptible to a tightening in monetary policy,” said Li Jun, a Shanghai-based strategist at Central China Securities Co. “Liquidity will be tighter in the short term.”

The People’s Bank of China boosted its benchmark one-year lending rate on Oct. 19 by a quarter of a percentage point to 5.56 percent, the first increase since 2007.

Consumer prices jumped 4.4 percent in October, the fastest pace in two years, and more than the 4 percent median forecast in a Bloomberg News survey of 28 economists. The government’s full-year inflation target is 3 percent.

Developers Drop

China’s property developers, utility companies and oil refiners are “most susceptible” to government policies to contain inflation, according to Credit Suisse Group AG.

“Governments usually tend to adopt some form of price control measures when inflation becomes a social issue,” said Peggy Chan and Vincent Chan, analysts at Credit Suisse.

A gauge of banks and developers in the CSI 300 Index dropped 4 percent to the lowest in more than a month.

Vanke, the nation’s largest developer by market value, fell 4.3 percent to 8.16 yuan. Poly Real Estate Group Co., the second-biggest developer, slid 5.5 percent to 12.24 yuan.

Foreigners will have to provide home ownership statements before their purchases, along with proof of at least a year’s employment in China, the State Administration of Foreign exchange and the Ministry of Housing and Urban-Rural Development said. Overseas companies are only allowed to buy offices in cities where they are registered, it said.

Banks Decline

Earlier measures couldn’t contain the increase in home prices, Premier Wen Jiabao said in Macau yesterday.

The central bank on Nov. 10 ordered an increase in bank reserve requirements by 50 basis points from today, the first nationwide increase since May. Credit Suisse Group Inc. said Nov. 11 it expects China’s new loan target for next year to be 5 trillion yuan, from 7.5 trillion yuan this year.

China Construction Bank fell 5.3 percent to 4.83 yuan. Bank of China Ltd. slid 3.5 percent to 3.32 yuan. Agricultural Bank dropped 2.9 percent to 2.67 yuan. China Life Insurance Co. and Ping An Insurance (Group) Co. declined more than 4 percent.

“Inflation is very high and the government acknowledges that,” Andy Xie, an independent economist, said in a Bloomberg Television interview in Hong Kong. “They will raise interest rates soon.”

Economic Outlook

The Shanghai gauge has rebounded 22 percent since reaching this year’s low on July 5 on expectations central banks around the world will inject more cash into their economies to boost growth. The index remains down 12 percent this year after the government raised bank reserve requirements and curbed lending growth to cool the economy.

Foreign direct investment in China increased at a faster pace in October, while an indicator of China’s economic outlook rose for a fifth month in September, adding to evidence the nation’s expansion has stabilized.

“Fundamentals have not changed but monetary policy and rhetoric will need to stay hawkish in the near term as the economy gets through this period of elevated year-over-year inflation numbers,” said Howard Wang, head of the Greater China team at JF Asset Management Ltd., which oversees more than $50 billion.

--Chua Kong Ho and Irene Shen in Shanghai. Editors: Allen Wan, Richard Frost

To contact Bloomberg News staff for this story: Chua Kong Ho in Shanghai at +86-21-6104-3048 or kchua6@bloomberg.net; Irene Shen in Shanghai at +86-21-6104-3049 or ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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