China’s Stocks Decline on Inflation, Smallcap Valuation Concerns

China’s stocks fell, extending last week’s drop, after China International Capital Corp. said inflation will jump this month and that investors should be cautious over smaller companies because of valuations.

China Construction Bank Corp., the nation’s second-biggest bank, fell 1.1 percent after the 21st Century Business Herald said the bank regulator will require lenders to control growth in loans to local government financing vehicles. Angel Yeast Co. plunged by the daily limit, pacing losses for smallcaps, as the food company’s profit missed analyst estimates. China Petroleum and Chemical Corp. jumped the most in two months after Securities Times reported the company’s 2010 profit including minority interest may exceed 100 billion yuan.

“Investors don’t see any fundamental changes to support a market rebound so far,” said Zhou Xi, a strategist at Bohai Securities Co. in Tianjin. “It’s not time to talk about gains but safe equity allocations.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 19.6, or 0.7 percent to 2,695.72 at the 3 p.m. close. The CSI 300 Index slipped 1 percent to 2,954.23, led by declines for energy, health-care and consumer staples companies. The CSI Smallcap 500 Index lost 2.4 percent to 4,398.50, the lowest in five months.

The Shanghai gauge slid 2.7 percent last week, driving valuations to 12.7 times estimated earnings, near the weakest in two years. The index has lost 15 percent from an almost seven- month high on Nov. 8, after the central raised the reserve requirement ratio for banks and interest rates to curb inflation.

Inflation Outlook

China’s consumer price index may increase 5.5 percent in January because of pressure from prices over the Chinese New Year holiday, CICC said in a report today, referring to the holiday that starts early next month. Inflation rose to a 28- month high of 5.1 percent in November before slowing to 4.6 percent last month.

China Construction Bank fell 1.1 percent to 4.67 yuan. Agricultural Bank of China Ltd., the third-largest lender, lost 1.2 percent to 2.59 yuan.

The banking regulator will require lenders to “strictly” control growth in loans to local government financing vehicles in 2011 and will hold bank executives accountable for any violations, the 21st Century Business Herald reported during the weekend, citing an unidentified person.

The regulator will only allow a “moderate” increase in loans to local government affordable housing programs this year, the report said.

The CSI Smallcap 500 slid to the lowest since Aug. 25. Still, the gauge trades at 43.4 times earnings, compared with 17.7 times for the CSI 300 Index. It has fallen 11 percent this year after gaining 98 percent over the past two years.

Smallcaps Drop

Investors should be cautious about smaller companies because their valuations may see a “remarkable” decline in coming years, CICC, the top-ranked brokerage for China research in Asiamoney magazine’s annual survey, said in a separate report.

Angel Yeast slid 10 percent to 35.61 yuan, the biggest loss since June 19, 2008. Earnings per share in 2010 were 0.93 yuan, according to a statement to the Shanghai exchange. This was lower than the market consensus estimate, Zhao Jinhou and Wang Qi, analysts at Shenyin & Wanguo Securities Co, wrote.

Kweichow Moutai Co., the biggest maker of baijiu liquor, led declines for a gauge of consumer staples in the CSI 300, falling 2.5 percent to 171.52 yuan, the lowest since Nov. 18. The gauge, down 1.9 percent today, trades at 36.5 times reported earnings after rallying 20 percent over the past six months, according to data compiled by Bloomberg.

“This is going to be a quite challenging year for Chinese equities,” Han Ching Choong, portfolio manager at Kriya Capital Ltd., said in a Bloomberg Television interview.

Rail Stocks

China Petroleum and Chemical, known as Sinopec, jumped 1.2 percent to 8.80 yuan, its highest close since Nov. 15. The company’s 2010 profit including minority interest may exceed 100 billion yuan, compared with 64 billion yuan a year earlier, the Securities Times reported, citing a report from Money Weekly magazine. Huang Wensheng, the Beijing-based spokesman of Sinopec, didn’t reply to calls to his office and mobile phone.

PetroChina Ltd., the nation’s largest oil producer, added 1.4 percent to 11.28 yuan.

China Railway Construction Corp., the builder of more than half of the nation’s railroads, surged 3.6 percent to 7.43 yuan, the highest Nov. 11. The company was raised to “neutral” at Credit Suisse Group AG, after the company said it will sell an unprofitable contract to its parent for 2.08 billion yuan.

China will have 16,000 kilometers (9,940 miles) of high- speed railway by 2015, Wang Zhiguo, vice minister of railways, said. The total length of China’s railways may rise to 120,000 kilometers by then from 91,000 kilometers now, Wang said.

Bonds Preference

Chinese companies raised over three times more from bonds than from equities this year in a record start for the debt market as government efforts to restrain inflation curbed access to loans and the stock market.

Corporate bond sales totaled 100 billion yuan ($15.2 billion) since Jan. 1, up 60 percent from a year earlier and the most since Bloomberg started tracking the data in 1999. Domestic currency share sales in 2011 total 28.8 billion yuan, down from 34 billion yuan a year earlier, data compiled by Bloomberg show.

--Irene Shen. Editors: Allen Wan, Richard Frost

To contact the Bloomberg News staff on this story: Irene Shen in Shanghai at ishen4@bloomberg.net.

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

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