China’s Stocks Decline, Extending Worst Week in 11 Months

China’s stocks fell, extending the benchmark index’s biggest weekly drop in 11 months, after a report showed profit growth slowed among industrial companies and concern intensified inflation will accelerate this month.

China First Heavy Industries Co., a maker of equipment used in the mining and energy industries, slumped to a record low. Shanghai Friendship Group Inc. led declines for retailers on concern higher borrowing costs will hurt consumer spending. FAW Car Co., which makes cars in China with Volkswagen AG, lost 1.8 percent after a research center predicted a 10 percent fall in auto sales this year. A gauge of smaller companies dropped for a ninth day out of 10.

“Investors are worried that the tightening is overdone and concerns have widened to a slowdown in earnings and economic growth from just inflation,” said Wang Zheng, chief investment officer at Jingxi Investment Management Co. in Shanghai, which manages about $120 million. “The market is still trying to find a bottom.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped for a seventh day, losing 26.58 points, or 1 percent, to 2,709.95 at the 3 p.m. close. It slid 5.2 percent this week, the biggest weekly drop since July 2. The CSI 300 Index (SHSZ300) retreated 0.5 percent to 2,963.31 while the CSI Smallcap 500 Index slumped 3.2 percent.

The Shanghai gauge has dropped 3.5 percent this year as the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times since the start of 2010 to cool inflation, which exceeded the government target each month this year. It has retreated 11 percent from this year’s high set on April 18, a sign to some investors that the market has entered a correction.

Consumer prices may increase as much as 5.5 percent from a year earlier this month, the National Business Daily reported today, citing Huachuang Securities Co. The inflation rate was at 5.3 percent in April, the fastest pace since 2008.

Inflation Outlook

The brokerage raised its May inflation estimate from 5.4 percent because vegetable prices in southern China had large gains due to drought, the Shanghai-based newspaper said. Vegetables account for about 20 percent of food costs, which in turn makes up about 30 percent of consumer prices, it said.

Profit at China’s industrial companies rose 29.7 percent in the first four months to 1.49 trillion yuan ($230 billion) from a year earlier, the National Bureau of Statistics said on its website today. That compared with a 32 percent gain in the first quarter of this year.

China First Heavy dropped 3 percent to 4.91 yuan, its lowest close since its listing in February last year. China Oilfield Services Ltd. (601808), the drilling unit of the nation’s largest offshore oil producer, lost 4 percent to 18.56 yuan.

Auto Sales

FAW Car lost 1.8 percent to 12.61 yuan. Chongqing Changan Automobile Co., the Chinese partner of Ford Motor Co. and Mazda Motor Corp., fell 1.8 percent to 8.95 yuan.

China’s auto sales may drop 10 percent this year with the end of government stimulus policies and restrictions on car licenses, the China Automotive Technology & Research Center said yesterday.

A gauge of consumer staples stocks lost 2.2 percent, the most among the CSI 300’s 10 industrial groups. Shanghai Friendship, an operator of department stores, fell 3.2 percent to 15.99 yuan. Yinchuan Xinhua Department Store Co. dropped 2.6 percent to 26.50 yuan.

PetroChina Co., the biggest oil company, advanced 0.8 percent to 10.97 yuan. China National Petroleum Corp., bought 31.1 million yuan-denominated shares, equivalent to a 0.017 percent stake, in the company on May 25, PetroChina said in a statement yesterday.

Credit Crunch

This week’s decline for China’s stocks has been triggered by signs that tightening measures are slowing the world’s second-biggest economy and making it more difficult for the nation’s smaller companies to borrow money for expansion.

China’s preliminary manufacturing index fell to its lowest level in 10 months, according to a report from HSBC Holdings Plc and Markit Economics this week. China’s small- and medium-sized companies are being squeezed by credit rationing and rising costs, Minggao Shen, an analyst at Citigroup, said in a report yesterday after meeting clients.

The seven-day repurchase rate, which measures funding availability between banks, touched 5.50 percent this week, the highest level since Feb. 23. The rate compared with 2.83 percent in April and 2.39 percent in March.

A gauge of drugmakers slumped 8.2 percent this week, the most among industry groups. “Institutions are selling drugmaker shares because there’s still a lot of uncertainty about the next round of drug price cuts by the government,” Li Ying, analyst at Capital Securities Corp., said yesterday.

Baring Asset

China’s stocks may rally after the central bank ends its tightening policy possibly by as early as the end of the third quarter, according to Khiem Do, head of multi-asset strategy at Baring Asset Management Ltd.

“Once it peaks, the market will have a very strong bounce,” Do, whose Baring Global Opportunities Umbrella Fund beat 99 percent of peers in the past year, said in a Bloomberg Television interview today. “Investors will come back to China at the end of third quarter or fourth quarter.”

Baring favors companies which aren’t too vulnerable to monetary tightening, such as consumer and health-care companies, Do said. Investors should wait before investing in “cheap” property and banking stocks, he said.

--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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