China's Stocks Drop on Concern Central Bank May Raise Rates This Weekend

China’s stocks rose, led by gold producers and consumer companies, as speculation that the Federal Reserve will buy more Treasuries spurred a rally for bullion and Goldman Sachs Group Inc. recommended liquor makers.

Zijin Mining Group Co., the largest gold producer, jumped the most in almost three weeks after bullion prices surged to a record. Kweichow Moutai Co. and Wuliangye Yibin Co. gained at least 1.6 percent after Goldman Sachs said the two spirits makers have strong pricing power. China Vanke Co. advanced to the highest in almost a month after Citigroup Inc. said property speculation has been curbed in some major cities.

“The preference for these non-cyclical stocks will carry on for quite a while amid the backdrop of government policy tightening,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Inflation pressure is there and the market is waiting for the next shoe to drop.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, rose 18.68, or 0.7 percent, to 2,875.86 at the 3 p.m. close, erasing a 1.7 percent loss. The CSI 300 Index added 1.1 percent to 3,200.34. Stocks fell earlier after the China Securities Journal reported the “window” for China to increase borrowing costs rates may be this weekend.

The Shanghai gauge has lost 9 percent since reaching an almost seven-month high on Nov. 8 on concern that monetary tightening will curb economic growth. The central bank last month ordered banks to set aside larger reserves for the second time in two weeks after raising interest rates in October, the first increase since 2007. The measure is down 12 percent this year, Asia’s worst performer.

QE Boost

Zijin Mining jumped 5.1 percent to 8.85 yuan, the most since Nov. 18. Zhongjin Gold Corp., the country’s second-largest bullion producer by market value, soared 5.9 percent to 42.54 yuan. Shandong Gold Mining Co., the third biggest, gained 5.1 percent to 57.93 yuan. Gold prices climbed to an all-time high of $1,427.55 yesterday and rose to a record in euro today.

Fed Chairman Ben S. Bernanke said in an interview broadcast yesterday by CBS Corp.’s “60 Minutes” program that Fed purchases of Treasuries beyond the $600 billion announced are “possible” given that U.S. unemployment may take five years to fall to a normal level.

“The Fed’s remarks on further quantitative easing will help commodity prices,” Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million, said yesterday.

Jiangxi Copper Co., China’s biggest producer of the metal, rose 2.4 percent to 36.92 yuan. Tongling Nonferrous Metals Group Co., the second biggest, climbed 4.1 percent to 28.08 yuan. Copper futures rose 0.2 percent yesterday in New York, after reaching the highest for a most-active contract since Nov. 12.

Rate Increase

China’s central bank may raise rates around the time set for the release of November’s inflation data, which has been scheduled for Dec. 13, the newspaper reported, citing Li Huiyong, an analyst at Shenyin & Wanguo Securities Co, who forecast consumer prices may rise 5.1 percent last month. Lu Zhengwei, an economist at Industrial Bank Co., sees a rate increase as being likely between today and Dec. 18, it said. Consumer prices rose 4.4 percent in October, the fastest pace in two years, because of higher food costs.

A gauge of consumer staples in the CSI 300 added 2.1 percent, the second most among the 10 industry groups. Kweichow Moutai, China’s biggest producer of baijiu liquor by market value, advanced 2.4 percent to 197.56 yuan while Wuliangye, the second biggest, climbed 1.6 percent to 37.80 yuan. Goldman Sachs said Kweichow Moutai and Wuliangye have strong pricing power and low policy risk.

Property Speculation

A measure of developers in the Shanghai Composite rose 1.4 percent, the most among the five industry groups.

Vanke, the nation’s biggest listed property developer, gained 2 percent to 8.66 yuan, the highest since Nov. 11. Poly Real Estate, the second largest, added 1.4 percent to 12.76 yuan.

China’s property speculation has been curbed in some of the nation’s “red hot” cities and industry sentiment is recovering, according to Citigroup. The real estate market is also being sustained by the lack of investment channels, Oscar Choi and Marco Sze, analysts at Citigroup, wrote in a report to clients dated yesterday.

Chinese companies traded in Hong Kong will outperform mainland stocks in the first half of next year as U.S. stimulus measures drive funds into the city and China policy tightening intensifies, according to Robeco Hong Kong Ltd.

“H shares may outperform in the first half and A shares may outperform in the second half,” Victoria Mio, senior portfolio manager at Robeco, which oversees $196 billion, said in a phone interview from Hong Kong yesterday. “The markets will be quite similar to this year, up-and-down market, but overall going up.”

--Zhang Shidong. With assistance from Irene Shen in Shanghai. 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: Darren Boey at dboey@bloomberg.net

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