China Stocks Drop to 3-Week Low as Rising Oil Prices Boost Inflation Risk

China’s stocks fell, driving the benchmark index to the lowest level this month, as higher oil prices boosted concerns inflation will accelerate and spur more policy tightening measures.

Baoshan Iron & Steel Co. led declines for steelmakers as oil rose to the highest in two weeks. Anhui Conch Cement Co., the biggest cement maker, and Sany Heavy Industry Co., the largest maker of machinery for handling concrete, retreated at least 2.8 percent on concern higher fuel prices may slow economic growth. A gauge of property stocks slid the most in two months after a state researcher said a property tax is needed to reverse imbalances in China’s wealth distribution.

“Inflation is still the major concern and there’s no sign that the government will relax its tightening,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “The tightening will hold back stocks’ valuations.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 45.57 points, or 1.5 percent, to 2,964.95 at the 3 p.m. close, the lowest since March 31. It declined 1.3 percent last week, the most in three months. The CSI 300 Index (SHSZ300) fell 1.5 percent to 3,249.57. Global financial markets including those in the U.S. and Europe were closed for a holiday on April 22. Hong Kong is shut today.

The Shanghai Composite has climbed 5.6 percent this year on speculation the government will cool inflation without triggering a slump in economic growth. The central bank has raised the reserve-requirement ratio 10 times since the start of 2010 and boosted interest rates four times to cool inflation as consumer prices rose at the fastest pace since 2008 in March.

Inflation Outlook

Baoshan Steel, the listed unit of China’s second-biggest steelmaker, fell 2.7 percent to 7.12 yuan. Hebei Iron & Steel Co., the listed unit of the nation’s biggest steelmaker, slumped 7.5 percent to 4.71 yuan. Anhui Conch dropped 2.8 percent to 38.88 yuan, trimming its gain to 31 percent this year. Sany Heavy slid 4.1 percent to 18.52 yuan.

Consumer prices may rise between 5.2 percent and 5.5 percent in April, according to China International Capital Corp. Non-food prices may gain between 0.2 percent and 0.4 percent from the previous month while food prices may drop, analysts led by Peng Wensheng wrote in a report dated yesterday. The government’s full-year inflation target is 4 percent.

Crude futures gained for a fourth day after Syrian security forces detained at least 200 people following the killing of anti-government protesters and U.S. Senator John McCain said rebels in Libya need more assistance in the fight against Muammar Qaddafi’s forces. Saudi Arabia, holder of the world’s largest crude reserves, has no plans to raise production capacity, an oil official said.

Oil Prices

The contract for June delivery rose as much as 78 cents, or 0.7 percent, to $113.07 a barrel in New York today. Futures advanced 84 cents to $112.29 a barrel on April 21, the highest settlement since April 8. Prices are up 34 percent in the past year. The market was shut April 22 for holiday.

Shanghai container-truck drivers were reported to have won cuts in port fees after a sometimes violent protest against rising costs highlighted the risk of inflation triggering unrest in the world’s most populous nation.

The local government will lower or remove some fees after drivers stopped work on April 20 because of the levies and increased fuel costs, Xinhua News Agency reported, citing an unidentified spokesman. The city’s ports are operating normally, the report said.

A gauge of property stocks in the Shanghai Composite slid 2.2 percent, the most since Feb. 22. Poly Real Estate Group Co., China’s second-largest developer by market value, dropped 2 percent to 13.44 yuan. Gemdale Corp. (600383) lost 0.3 percent to 6.62 yuan.

Property Tax

The nation needs to improve its property reporting system and to levy taxes on various personal holdings, including on real estate, capital earnings, inheritances and donations, Zhang Monan, a researcher with the State Information Center, wrote in a commentary published in today’s China Daily newspaper. The State Information Center is a research agency under the National Development and Reform Commission.

China imposed a property tax in Shanghai and Chongqing in January to curb rising home prices.

Henan Shuanghui Investment & Development Co., China’s biggest listed meat processer, slumped 7 percent to 58.52 yuan, the lowest since Nov. 29. The company and its parent refunded 112 tons of meat products, accounting for 4 percent of sales from March 24 to April 20, Shuanghui said in a statement.

The company on April 18 confirmed a China Central Television report that an affiliate purchased pigs fed with a banned additive that induces the growth of lean meat.

Consumer Staples

A measure of consumer staple producers added 0.6 percent, the most among the 10 industry groups in the CSI 300.

Kweichow Moutai Co., the biggest producer of baijiu liquor by market value, surged 3.9 percent to 183.06 yuan. First- quarter net income rose 49 percent from the same period a year earlier to 1.88 billion yuan ($288.6 million), the company said in a statement over the weekend. Profit beat the 1.81 billion yuan average of three analysts’ estimates compiled by Bloomberg.

Wuliangye Yibin Co., China’s second-biggest maker of white liquor by market value, gained 1.2 percent to 32.32 yuan. Luzhou Laojiao Co., a sprits producer in the southwest province of Sichuan, added 4.2 percent to 46.91 yuan.

China’s rising wages will bolster domestic consumption, making travel and hotel stocks attractive investments, according to Hugh Simon, Chief Executive Officer of Hamon Investment Group.

The Chinese government’s efforts to double salaries over the next five years will boost spending, said Simon, whose Dreyfus Greater China Fund has beaten 90 percent of rival funds in the past five years, according to data compiled by Bloomberg.

Wage inflation “is not a bad thing when you are moving your economy away from an export-led economy and gives you a lot of opportunities as an investor,” Simon said in an interview with Bloomberg Television today. The Hong Kong-based fund manager said he’s also “looking at” airlines and information technology service companies.

--Zhang Shidong. Editor: Allen Wan

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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