Chinese Stocks Slump on Inflation, U.S. Credit Rating Concerns

China’s stocks fell the most in two months on concern inflation will spur the government to keep tightening monetary policy and as Standard & Poor’s Ratings Service cut its outlook on U.S. credit, fueling concern that a recovery in the global economy may slow.

Jiangxi Copper Co., China’s biggest producer of the metal, dropped 3.4 percent after copper prices slid for a sixth day in New York. China Vanke Co. paced losses for developers after Credit Suisse Group AG said the government may boost measures to curb property investment. Henan Shuanghui Investment & Development Co., the biggest publicly traded food producer, plunged by the 10 percent daily limit amid an investigation into illegal additives.

“The U.S credit outlook cut will have short-term negative effects on investors’ confidence,” said Mei Luwu, a Shenzhen- based fund manager of Lion Fund Management Co., which oversees more than $7.8 billion. “The risks have been there and the market is plunging now that they are exposed.”

The Shanghai Composite Index slid 58.3 points, or 1.9 percent, to 2,999.04 at the 3 p.m. close, the biggest slump since Feb. 22. The CSI 300 Index (SHSZ300) declined 1.9 percent to 3,295.81.

The Shanghai Composite has climbed 6.8 percent this year, the best performer among the biggest Asian markets, as optimism about growth in the world’s second-largest economy and corporate earnings outweighed measures to cool inflation. The central bank has announced 10 reserve-requirement ratio increases since the start of 2010 and raised interest rates four times.

U.S. Outlook

In New York, the Standard & Poor’s 500 Index fell 1.1 percent yesterday, its biggest retreat since March, after S&P lowered its outlook on U.S. debt to “negative.” The ratings agency said that more than two years after the beginning of the financial crisis, U.S. policy makers haven’t agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.

Jiangxi Copper slid for a seventh day, losing 3.4 percent to 37.71 yuan. Yunnan Copper Industry Co. (000878) fell 3.5 percent to 25.09 yuan. PetroChina Co., the nation’s biggest oil producer, slipped 2.1 percent to 11.86 yuan. China Shenhua Energy Co., the listed unit of China’s biggest coal producer, dropped 4.6 percent to 29.32 yuan.

July-delivery copper on the Comex in New York lost 0.2 percent to $4.2085 a pound, erasing gains of as much as 0.8 percent earlier. June-delivery futures in Shanghai declined as much as 2 percent to 69,630 yuan a ton, the lowest level since March 17.

Reserve Ratio

U.S. President Barack Obama unveiled a plan on April 13 to cut $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases. The U.S. House passed a Republican budget on April 15 that would cut spending by more than $6 trillion over a decade.

The People’s Bank of China said on April 17 it will lift lenders’ reserve requirements following government reports showing inflation rose 5.4 percent last month. That exceeded the median forecast in Bloomberg News surveys of economists for 5.2 percent.

“We expect to see fluctuations around 3,000 for the index as the March inflation data boosted concerns over tightening measures,” said Mei.

China Vanke, the largest developer, declined 2 percent to 8.78 yuan. Gemdale Corp. (600383) sank 2.5 percent to 6.76 yuan. Data showing 50 of 70 cities recorded a month-on-month increase in property prices invites more tightening policies, Credit Suisse said.

Investment Increase

Foreign direct investment surged 33 percent in March, adding $12.5 billion to China’s economy, the Ministry of Commerce said today.

The People’s Bank of China will raise interest rates twice more in the next 12 months as capital inflows complicate efforts to tame inflation, according to the cost to fix borrowing costs in the swap market.

Two-year contracts indicate the one-year deposit rate will be boosted 58 basis points in the next 12 months to 3.83 percent after four increases the past year, data compiled by Bloomberg show. On April 6, they projected a rate of 3.71 percent. Foreign reserves jumped $197 billion in the first quarter to a record $3 trillion.

Barton Biggs, a former chairman of Morgan Stanley Asset Management, said the move by China’s central bank, which indicates the country is going to do whatever it takes to cool inflation, makes him nervous about his bullish position on Asia and global equities.

’Nervous’ About Stocks

“China is the world’s locomotive,” he said. “It’s making me nervous about my commitment to Asia, making me nervous about my commitment to stocks in general, not just China.”

The longest rally in developing-nation stocks since 1997 may be ending as higher interest rates in Brazil, Russia, India and China curb earnings growth.

For the first time in two years, emerging-market analysts are cutting profit estimates more than they’re raising them, consumer stocks are trailing energy producers and shares of smaller companies are losing to larger equities, data compiled by Bloomberg and Morgan Stanley show.

Henan Shuanghui fell 10 percent to 70.15 yuan on their first day of trading since a monthlong suspension. The company yesterday confirmed a China Central Television report that an affiliate purchased pigs fed with a banned additive that induces the growth of lean meat.

“The incident will affect Shuanghui’s sales by between 2 billion yuan and 4 billion yuan ($612 million) in 2011,” Tong Xun and Man Zhen, Shanghai-based analysts at Shenyin & Wanguo Securities Co., wrote in a report today.

Lion Fund’s Mei is cautious on small-cap food producers and health-care companies, while favoring banks, developers, coal producers and chemical companies.

“Overall, we are positive on the A-share market for the second quarter given the undeterred economic growth,” Mei said. “Valuations and the earnings outlook make some A-share companies very attractive investments globally.”

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

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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