China’s Stocks Fall Most in Two Months on ‘Critical’ Inflation

China’s stocks fell the most in two months after the government said taming inflation is “critical,” signaling to investors that more policy tightening measures may be ahead even as economic growth slows.

China Shenhua Energy Co., the nation’s biggest coal company, and Yanzhou Coal Mining Co. plunged more than 5 percent after Goldman Sachs Group Inc. said the government may cap thermal coal prices to help power producers. Jiangxi Copper Co. and PetroChina Co. led a drop for commodity producers as metal and oil prices extended declines. China Citic Bank Corp. fell the most in six months after the China Securities Journal said the central bank will raise lenders’ reserve requirements this month.

“Curbing inflation is the top priority for the government,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “China’s economic growth has shown signs of a slowdown but that won’t change the government’s intention to cool inflation with more monetary measures.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 66.2 points, or 2.3 percent, to 2,866.02 at the 3 p.m. close, the most since Feb. 22. The CSI 300 Index (SHSZ300) retreated 2.6 percent to 3,129.03. The MSCI Emerging- Markets Index dropped 0.8 percent amid concern faster inflation in developing nations may prompt more interest-rate increases. India’s central bank boosted rates by an unexpected half a percentage point yesterday.

China’s central bank has lifted borrowing costs four times since October to cool prices that grew at the fastest pace since 2008 in March. It has also ordered lenders to set aside reserves 10 times since the start of last year to curb lending. The government is tightening monetary policy even as the measures threaten to slow the world’s second-biggest economy. The Purchasing Managers’ Index, a gauge of manufacturing growth, fell to 52.9 in April from 53.4 in March.

Central Bank

“A moderate growth slowdown in 2011 could be taken as a signal of a hard landing going forward,” Bank of America- Merrill Lynch economists led by Ting Lu said in a report today.

Growth indicators such as industrial production and fixed- asset investment will likely moderate in April from March, they said. China’s inflation rate may fall to around 5 percent in May before peaking above 5.5 percent in June, they said.

“Stabilizing prices and managing inflation expectations are critical,” the People’s Bank of China said in a first- quarter monetary policy report published yesterday. Bank reserve requirements have no “absolute ceiling,” the report said, restating Governor Zhou Xiaochuan’s comment on April 16.

Jiangxi Copper, the nation’s biggest copper producer, sank 6 percent to 34.62 yuan. Yunnan Copper Industry Co. (000878) fell 3.8 percent to 23.15 yuan. Copper declined in London, falling for the fourth time in five days, on concern about the strength of demand in China, the biggest user.

Commodity Stocks

PetroChina, the nation’s biggest energy producer, led declines for oil companies, sliding 2.2 percent to 11.46 yuan. Crude fell for a third day in New York, the longest losing streak since March. Oil for June delivery slid as much as 61 cents to $110.44 a barrel in electronic trading on the New York Mercantile Exchange.

Yanzhou Coal, China’s fourth-biggest coal producer, plunged 7.1 percent to 33.14 yuan, the biggest drop since Nov. 16. China Shenhua dropped 5.7 percent to 28.12 yuan.

The government may allow tariff increases for independent power producers and control thermal coal contract prices, Goldman Sachs said in a report today.

“The Chinese government may step in to cap coal prices because inflationary concerns may prevent the NDRC from raising power tariffs to a large extent,” David Fang, a director of research at the China Coal Transport and Distribution Association, said by phone from Beijing.

Bank Requirements

The central bank may raise banks’ reserve requirement ratios this month as new yuan positions at Chinese banks accumulated from sales of foreign exchange to the central bank may remain high, the China Securities Journal reported on its front page today, citing unidentified people.

Bank of Beijing Co. slipped 3.5 percent to 11.42 yuan. Industrial Bank Co. slid 2.6 percent to 28.36 yuan.

China Citic Bank lost 2.9 percent to 5.42 yuan. China Citic faces long-term pressure on capital financing after the banking regulator announced its own version of the Basel requirements yesterday, Wang Kang, head of the bank’s planning and accounting department, said on a conference call today. The nation’s systemically important banks must have a minimum capital adequacy ratio of 11.5 percent by the end of 2013, the China Banking Regulatory Commission said in a statement yesterday.

Developers Fall

China Vanke, the biggest developer, slid 2 percent to 8.33 yuan. A gauge tracking property stocks in the Shanghai Composite retreated 2.2 percent.

China may extend limits on the purchase of property and on home prices to more cities, the Shanghai Securities News reported today, citing an unidentified person close to the Ministry of Housing and Urban-Rural Development.

An unidentified official at the housing ministry has urged policies be taken to limit investment in smaller cities by investment funds that weaken efforts to control the Chinese property market, the Shanghai-based newspaper reported.

Guangshen Railway Co., the operator of trains in China’s richest province of Guangdong, jumped 8.7 percent to 4.38 yuan, the most since September 2008. The company will benefit from the government’s plan to expand business operations for railway companies, Sinolink Securities Co. said in a report yesterday.

Today’s drop for the Shanghai Composite, the steepest among the 90 global indexes tracked by Bloomberg, pared the measure’s gains for this year to 2.1 percent.

“Investors are overly pessimistic and have overreacted to the central bank’s intention to further tighten monetary policies,” said Mei Luwu, a Shenzhen-based fund manager of Lion Fund Management Co., which oversees more than $7.8 billion. “More tightening monetary measures will hurt economic growth but China is unlikely to see a hard landing.”

--Irene Shen. Editor: Allen Wan, Reinie Booysen

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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