China Stocks Drop for Fifth Day, Longest Losing Streak This Year, on Rates

China’s stocks fell for a fifth day, capping the longest stretch of losses this year, on speculation the government will increase interest rates by as early as next week to tame inflation.

China Vanke Co. and Poly Real Estate Group Co., the nation’s biggest developers, lost more than 1 percent as Credit Suisse Group AG said the central bank may boost borrowing costs on May 2 and Shenyin & Wanguo Securities Co. said the government may add to property price curbs. Angang Steel Co. slid to the lowest in two months after net profit tumbled. Hainan Airlines Co. paced a retreat for B shares on speculation the government will impose a capital gains tax on trading in these equities.

“With tightening measures likely to be intensified, all this bad news is weighing on stocks,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “Corporate earnings in some sectors didn’t meet expectations and there’s room for them to be revised downward.”

The Shanghai Composite Index fell 38.37 points, or 1.3 percent, to 2,887.04 at the 3 p.m. close, capping a five-day, 4.6 percent drop and the lowest level since Feb. 25. The CSI 300 Index (SHSZ300) lost 1.5 percent and the Smallcap 500 Index slid 3.2 percent. The Shanghai B Share Index tumbled 2.8 percent, adding to a four-day, 7.8 percent retreat.

The Shanghai Composite has declined 5.6 percent from a five-month high on April 18 amid concern the government will add to 10 increases in lenders’ reserve requirements and four rises in interest rates to cool inflation. The drop has pared the stocks gauge’s advance this year to 2.8 percent.

China may raise borrowing costs early next month, with the “most likely” timing being May 2, Dong Tao, an analyst at Credit Suisse, wrote in a report today. The brokerage also expects one more reserve ratio increase for banks “towards” late May after the government releases April inflation and lending figures, the analyst wrote.

Property ‘Risk’

Poly Real Estate, China’s second-largest developer by market value, retreated 2.8 percent to 12.91 yuan. China Vanke Co., the biggest, slipped 1.1 percent to 8.31 yuan. Citichamp Dartong Co., a developer based in the southeast province of Fujian, dropped 5.9 percent to 8.81 yuan.

The central government may increase measures to cool the property market by extending restrictions on house purchases, or by requiring local governments to set stricter targets for controlling home prices, analysts led by Li Huiyong at Shenyin & Wanguo Securities wrote in a report today.

China’s real-estate market is a “particular source of risk” to growth given the importance of property construction to the world’s second-biggest economy, the World Bank said today. “Shocks to the property sector that would slow down construction significantly could have a large impact on the economy and on bank balance sheets,” the Washington-based lender said in its China Quarterly Update.

Economy May ‘Stumble’

Anhui Conch Cement Co., the nation’s biggest maker of the building material, slumped 6 percent to 37.01 yuan, the biggest drop since Nov. 17 and trimming its gain this year to 25 percent. Gansu Qilianshan Cement Group Co. slid 4.4 percent to 18.88 yuan. Huaxin Cement Co., the Chinese affiliate of Holcim Ltd., lost 3.4 percent to 48.88 yuan.

Jeremy Grantham said there is a 25 percent chance that China will “stumble” by next year over imbalances such as too much capital spending, an overheating real estate market or accelerating inflation.

“You could have a financial stumble, a housing stumble, a stumble from rebalancing of capital spending, or any combination thereof,” Grantham, chief investment officer of Grantham Mayo Van Otterloo & Co., said in an April 26 interview in Boston.

Angang Steel Co. fell 2.4 percent to 7.77 yuan. Net income tumbled 94 percent from a year earlier in the first quarter, the steelmaker said in a statement last night.

Quarterly Profits

Earnings per-share at the 657 companies that have released first-quarter earnings on the Shanghai Composite trailed analysts’ estimates by 3.4 percent, according to data compiled by Bloomberg.

A gauge of financial stocks rose 0.1 percent on the CSI 300, the only gainer among the CSI 300’s industry groups.

Agricultural Bank of China Ltd. (601288), the nation’s fourth largest by assets, added 2.1 percent to 2.96 yuan. Net income climbed 36 percent from a year earlier to 34.1 billion yuan ($5.24 billion), the bank said last night. That compared with the 33.1 billion yuan median estimate of six analysts surveyed by Bloomberg News.

Industrial & Commercial Bank of China (601398) Ltd., the nation’s biggest listed lender, gained 1.1 percent to 4.59 yuan. ICBC is due to release first-quarter profit today. The nation’s four- biggest banks reported record annual profit last year as higher interest rates boosted net interest margins.

Tax Speculation

China’s B shares tumbled 5.3 percent yesterday on “rumors” the government would impose a capital gains levy on the foreign-currency denominated stock under a trial program, Shanghai Securities News reported. Speculation that the government would allow greater strengthening of the currency also dragged down equities, according to China Business News.

“There are lots of rumors about B shares such as a capital gain tax and yuan appreciation and all these things are weighing on the market,” said Dazhong Insurance’s Wu. “It’s an opaque market dominated by retail investors, who tend to believe market rumors and then sell in panic.”

China is unlikely to start taxing investors on their capital gains any time soon, Reuters reported today, citing a tax official it didn’t name. A rumored one-time yuan revaluation this weekend is unlikely to happen as the adverse impact on exports would be too great, China Business News reported, citing unidentified market participants. A news official with the central bank, who declined to be identified because of the monetary authorities’ rules, declined to comment.

Smallcaps Drop

Hainan Airlines’ B shares slid 1.9 percent to $1.04, adding to yesterday’s 7.7 percent plunge.

The Smallcap 500 Index fell for a fifth day. The China Securities Regulatory Commission denied speculation that the regulator is “purposely” accelerating the pace of approving initial public offerings by domestic companies to curb the stock market, the China Securities Journal reported today, citing an unidentified official at the commission.

--Zhang Shidong. Editors: Allen Wan, Richard Frost

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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