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China Stocks Drop for Second Day as Smallcaps, Commodities Slump

China’s stocks fell on speculation the government’s tightening measures will curb demand for property and commodities and as small companies extended this year’s plunge amid slumping demand for initial public offerings.

A gauge of smaller companies retreated to a five-month low. Jiangsu Skyray Instrument Co., Wonders Information Co. and two other smallcaps making their market debut fell below the offer price. Gemdale Corp. led declines for real-estate developers after China Business News reported the Shanghai government will impose a higher-than-expected property tax. China Petroleum and Chemical Corp. and Yanzhou Coal Mining Co. dropped more than 1 percent as oil prices declined.

“Investors are seeking a haven for their money before the Chinese New Year, moving to sectors with lower valuations,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “Smaller companies are regarded as more risky at the moment.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 18.3, or 0.7 percent, to 2,677.43 at the 3 p.m. close, the lowest since Sept. 30. The CSI 300 Index slipped 0.5 percent to 2,938.65.

The Shanghai gauge has lost 15 percent since a Nov. 8 high after the central bank raised the reserve requirement ratio for banks and interest rates to counter inflation. Consumer prices rose to a 28-month high of 5.1 percent in November before slowing to 4.6 percent last month.

The CSI Smallcap 500 Index slid 1.3 percent to 4,341.91, the lowest since Aug. 13. The gauge trades at 42.8 times earnings, compared with 17.6 times for the CSI 300 Index. It has fallen 12 percent this year after gaining 98 percent over the past two years.

China’s mutual funds boosted their stock holdings to a near-record high, a signal to fund trackers that investors are overly optimistic and equities may decline further.

Sell Smallcaps

“Judging by mutual funds’ stock positions, the correction in the stock market isn’t over yet and lots of them are still selling small-caps,” said Liu Zhaoyang, a Shanghai-based analyst at Howbuy, a consulting firm on investment funds.

Jiangsu Skyray fell from its IPO price of 65 yuan, sliding 17 percent to 54.16 yuan. Wonders Information lost 12 percent to 24.60 yuan. Shenzhen Dvision Video Communications Co. slid 14 percent to 44 yuan. Beijing Orient National Communication Science & Technology Co. dropped 13 percent to 47.95 yuan.

The number of smaller Chinese companies selling initial public offering shares last year was almost equal to the combined amount over the previous five years, according to China International Capital Corp.

A record 321 smaller companies went public on Shenzhen’s small and medium enterprises board and the ChiNext market in 2010, compared with 363 companies from 2004 to 2009, analysts led by Hou Zhenhai wrote in a note yesterday.

Cash Squeeze

China’s commercial banks, facing a cash shortage before the Chinese New Year holiday, offered record-high deposit rates to secure 30 billion yuan ($4.6 billion) of government money at an auction today. The benchmark money-market rate jumped the most in three years.

The seven-day repurchase rate, which measures money availability between banks, surged 2.85 percentage points, to a three-year high of 7.65 percent, according to a daily fixing by the National Interbank Funding Center in Shanghai. The increase was the biggest since January 2008. The three-month Shanghai Interbank Offered Rate, also a gauge of liquidity in the financial system, was fixed 20 basis points higher at a record 5.25 percent.

A gauge tracking developers in Shanghai Composite fell 0.3 percent today. Gemdale retreated 0.8 percent to 7.21 yuan.

Property Tax

Shanghai has sent a plan for a property tax in the city to China’s Ministry of Finance for approval that would implement a 4 percent levy on the value of homes, China Business News Television reported late yesterday, citing an unidentified person. The city will impose the tax on newly purchased homes of more than 60 square meters per person, according to the report.

A tax of 0.6 percent or 0.8 percent may be levied on all apartments larger than 60 square meters per person in size, even if they are a person’s first home, the Securities Times said on Jan. 20.

China Petroleum and Chemical, the nation’s biggest refinery, dropped 1.5 percent to 8.67 yuan. Yanzhou Coal retreated 2.8 percent to 23.40 yuan. The March contract declined as much as 0.6 percent to $87.39 a barrel in New York.

A gauge of material producers dropped 1.4 percent in the CSI 300 Index. Zhongjin Gold Co. fell 2.5 percent to 32.28 yuan, the lowest close since Aug. 6. Shandong Gold Mining Co. lost 3.4 percent to 41.72 yuan. Aluminum Corp. of China Ltd. dropped 2.7 percent to 10.14 yuan.

Healthcare Stocks

Gold for immediate delivery fell as much as 0.3 percent to $1,331 per ounce, taking its decline from a Dec. 7 record to more than $100. Aluminum futures price slid 0.2 percent to $2,408.50 a ton, extending declines for a second day on the London Metal Exchange.

A gauge of health-care companies in CSI 300 Index increased 0.2 percent. Kangmei Pharmaceutical Co. led gains, rising 2.5 percent to 14.20 yuan.

Health-care companies offer buying opportunities as China enters an “aging society,” said Tang Yifeng, a fund manager who oversees $2.1 billion at Bosera Asset Management Co., in an e-mailed note today.

--Irene Shen. With assistance from Weiyi Lim. 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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