China Stocks Fall on Inflation Concern as Developers, Power Producers Drop

China’s stocks fell for the first time in three days, led by property developers and power producers, on concern the central bank will boost borrowing costs and higher energy costs will hurt corporate earnings.

Poly Real Estate Group Co. led declines for developers after the 21st Century Business Herald quoted a central bank adviser as saying interest rates should be raised. Huaneng Power International Inc. (600011), the listed unit of China’s largest power group, slid 2.7 percent on concern higher coal prices will erode earnings. Shanxi Xinghuacun Fen Wine Factory Co. advanced to a five-month high after Shenyin & Wanguo Securities Co. boosted its earnings forecast for the Chinese liquor maker.

“Inflation expectations are still there and concerns about more tightening such as interest-rate increases will provide a drag on the broader market,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “Consumer stocks are good hedges in this scenario.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 13.20 points, or 0.5 percent, to 2,859.57 at the 3 p.m. close. The CSI 300 Index (SHSZ300) retreated 0.6 percent to 3,120.64.

The Shanghai Composite has fallen 6.5 percent from a five- month high on April 18 amid concern government measures to cool inflation will slow corporate earnings growth. The central bank has raised the reserve-requirement ratio for banks 11 times since the start of 2010 and boosted rates four times. The drop pared this year’s gain for the Shanghai gauge to 1.8 percent.

‘Range’ Trade

Chinese stocks will trade in a “range” until the middle of the year amid concerns over inflation and slowing economic growth, according to Nomura Holdings Inc. The brokerage remains “optimistic” on the market for the full year, saying the economy will likely enter a “soft landing,” according to a report by analysts including Henry Wu.

A gauge tracking 34 property companies on the Shanghai Composite dropped 1.7 percent, the most among the five industrial groups. Poly Real Estate, China’s second-largest developer by market value, lost 2.1 percent to 10.11 yuan. Gemdale Corp. (600383) slid 1.4 percent to 6.32 yuan.

China’s home prices rose in 67 of 70 cities monitored by the government in April from last year, led by smaller cities that are defying efforts to control property prices nationwide, government data showed yesterday.

The government should raise the deposit rate to eliminate negative real interest rates, the 21st Century Business Herald reported today, citing central bank adviser Li Daokui. Inflation may be within 4 percent this year, the newspaper reported, citing Li, who made the remarks at a forum in Shenzhen.

Inflation Rate

Inflation may exceed 6 percent in June or July due to a lower comparison base last year, the National Business Daily reported today, citing Liu Yuhui, a researcher with the Chinese Academy of Social Sciences.

Huaneng Power, the listed unit of China’s largest power group, slid 2.7 percent to 6.23 yuan, its lowest close since April 29. Datang International Power Generation Co., a unit of China’s second-biggest electricity producer, fell 2.8 percent to 7.07 yuan.

The Bohai-Rim Steam-Coal Price Index, or BSPI, rose 0.9 percent to 827 yuan ($127.2) a metric ton as of yesterday compared with a week earlier, according to the Qinhuangdao Seaborne Coal Market website. The weekly gauge tracks power- station coal prices at six major Chinese ports.

China’s seasonal summer electricity shortages may worsen this year as a surge in coal costs deepens tensions between the nation’s power-generating companies and regulators who cap the rates they can sell to utilities. The nation’s power shortage may last beyond summer, said Dave Dai, a Hong Kong-based analyst at Daiwa Securities Capital Markets.

Liquor Makers

A measure of 19 consumer staples stocks rose 0.4 percent for the second-biggest gain among the CSI 300’s 10 groups. Shanxi Xinghuacun Fen Wine climbed 2.4 percent to 71.69 yuan, the highest close since Dec. 16.

The Chinese liquor maker completed 40 percent of its annual sales target for 2011 in the first quarter and may lift the whole-year target, Tong Xun, an analyst at Shenyin & Wanguo Securities, wrote in a report today. The brokerage boosted Xinghuacun Fen Wine’s earnings per-share for this year by 3.3 percent to 2.19 yuan and for 2012 by 5 percent to 3.17 yuan.

Kweichow Moutai Co., China’s biggest producer of baijiu liquor by market value, gained 2.5 percent to 199.88 yuan. Wuliangye Yibin Co., the second largest, added 1.5 percent to 34.34 yuan.

--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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