China Stocks Plunge Most in Two Months on Bank Reserve Increase

China’s stocks plunged, driving the benchmark index down the most in two months, as the central bank ordered banks to set aside more reserves and rising property prices signaled policy tightening measures may be expanded.

Industrial and Commercial Bank of China Ltd. and China Construction Bank Corp. led declines for banks after the government boosted reserve requirements for the fourth time in two months to curb liquidity. Property developers China Vanke Co. and Poly Real Estate Group Co. slid more than 6 percent. Qingdao Haier Co., a home appliances maker, fell the most in two months on concern higher interest rates will damp consumer spending.

“The market is reacting negatively towards the reserve ratio increase,” said Deng Eryong, a strategist at Changjiang Securities Co. in Shanghai. “The property industry will see continued scrutiny. No doubt more shoes are going to drop and no one knows when this will all end.”

The Shanghai Composite Index tumbled 84.7, or 3 percent, to 2,706.66 at the 3 p.m. close, the most since Nov. 16. The CSI 300 Index slid 3.8 percent to 2,974.35, the lowest since Sept. 30. The Shanghai measure has fallen 3.6 percent in 2011. It extended last year’s 14 percent plunge, the most among the world’s 10 biggest stock markets, after Premier Wen Jiabao’s government ordered six increases in reserve requirements and boosted interest rates twice in 2010 to curb asset bubbles after record gains in lending and property prices.

A gauge of financial companies including banks and developers in the CSI 300 Index fell 4.1 percent today. ICBC, the biggest lender, slid 2.8 percent to 4.23 yuan. Rival China Construction Bank dropped 4.1 percent to 4.71 yuan.

Reserve Increase

The central bank told lenders on Jan. 14 to hold more deposits as reserves, lifting required ratios by 50 basis points. The reserve requirement now stands at 19 percent for the biggest banks, excluding any additional restrictions imposed on individual banks and not publicly announced.

Wen’s government is trying to mop up liquidity resulting from its policy of limiting currency appreciation and from surging inflows of capital from overseas. Banks extended 7.95 trillion yuan of new loans last year, exceeding the central bank’s target of 7.5 trillion yuan.

“The reserve requirement increase exceeded market expectations,” said Li Jun, strategist at Central China Securities Holdings Co. in Shanghai. “Investors had expected policies to ease a bit towards the year end. The worry now has shifted to a slowdown in the economy itself from simply policy tightening.”

Air China Ltd., the nation’s biggest international carrier, dropped 5.2 percent to 12.31 yuan. GD Midea Holding Co., China’s largest home appliance maker by market value, slid 5.3 percent to 16 yuan. Qingdao Haier plunged 9 percent to 24.78 yuan.

Inflation Outlook

The central bank will probably add to reserve requirement increases to rein in liquidity and boost interest rates around the Chinese New Year next month because inflation may quicken to 6 percent in the first quarter, Yuan Yi, an analyst at Shenyin & Wanguo Securities Co., wrote in a report over the weekend. The November inflation rate was 5.1 percent, compared with the government’s target of 3 percent for 2010.

China is lagging behind counterparts across Asia that took steps earlier to raise borrowing costs from global recession lows. India has lifted its benchmark rate six times since March, while Malaysia increased it three times, also starting in March. Taiwan began increasing rates in June and South Korea in July.

Cut Positions

Investors should reduce their positions in China’s stocks and buy consumer companies that are less dependent on economic growth, according to Shenyin & Wanguo.

China International Capital Corp. boosted its estimate for inflation this year to 4.5 percent from 4.3 percent, according to an e-mailed note to clients today. Inflation is more likely to peak in the first quarter rather than the second quarter, according to the economists led by Peng Wensheng.

China’s real estate prices rose for a 19th month in December, raising concerns that the government will expand curbs to limit the risk of asset bubbles in the world’s fastest- growing major economy.

Property prices in 70 cities rose 6.4 percent in December from a year earlier, China Information News, the statistics bureau’s newspaper, reported today. Prices in December gained 0.3 percent from November, the report said.

“Continued increases in prices will worry policy makers, given how unaffordable homes have become,” said Dariusz Kowalczyk, economist with Credit Agricole CIB in Hong Kong. The slower price gain in December “is unlikely to be enough to prevent further measures to cool the market,” he said.

Property Tax

A gauge tracking developers in the Shanghai Composite declined 5.4 percent, the most among the index’s five industry groups. Vanke dropped 7 percent to 8.42 yuan. Poly Real Estate fell 8.7 percent to 13.60 yuan.

Shanghai, China’s financial center, will this year prepare for a trial property tax, becoming one of the first cities in the nation to introduce the measure aimed at curbing “speculative” investment.

Mayor Han Zheng announced the move in a speech over the weekend, without giving details of how much the tax would be or when it would be implemented.

Shanghai and southwestern Chongqing are the two cities that will begin trials of a property tax, according to a Jan. 10 report by Nomura Holdings Inc., which expects China to selectively introduce a tax rate of about 0.8 percent.

‘Quite Positive’

China’s economy may have grown about 10 percent in 2010, and the biggest risk this year would be “overheating,” according to Yao Jingyuan, chief economist at the nation’s National Bureau of Statistics. The bureau is scheduled to release data including full-year economic growth and December consumer price index figures this month.

China’s bank reserve-ratio increase doesn’t change the “quite positive” outlook for the nation’s stocks, which will be boosted by the expanding economy and improving earnings, said Royal Bank of Scotland Group Plc.

“Rising rates are more illustrative of a more robust growth outlook while rising inflation spurs nominal earnings,” said Emil Wolter, Singapore-based head of Asian regional equity at RBS. “The market will likely take this move in its stride.”

The CSI 300 Index may advance 28 percent this year, as investors shift to equities from banking deposits because of accelerating inflation and earnings growth prospects, according to Goldman Sachs Group Inc.

The CSI 300 will likely rise to 4,000 by the end of 2011, compared with the close of 3,128.26 last year, analysts led by Hanfeng Wang wrote in a report dated today.

--Irene Shen. With assistance from Zhang Shidong and Richard Frost. Editors: Allen Wan, Darren Boey

To contact Bloomberg News staff for this story: 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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