China’s Stocks Fall to 4-Month Low on Growth, Inflation Concern

China’s stocks dropped, driving the benchmark index to a more than four-month low, before the release of economic data tomorrow that may show industrial output is slowing as inflation accelerates.

Industrial and Commercial Bank of China Ltd., the world’s largest bank by market value, led a decline by banks as an official report showed new loans dropped in May from April. Chongqing Changan Automobile Co., the Chinese partner of Ford Motor Co. and Mazda Motor Corp., dropped to a one-year low after sales declined 4 percent in May from a year earlier.

China’s economy is facing stagflation with economic growth slowing and inflation remaining at high levels,” said Xia Chun, a fund manager at Bosera Fund Management Co. “Investors can’t be too optimistic about the outlook for the A- share market, as the economic slowdown will hurt companies earnings.”

The Shanghai Composite Index retreated 25.91 points, or 1 percent, to 2,679.23 at 9:41 a.m. local time, adding to a 0.8 percent weekly loss. The CSI 300 Index (SHSZ300) slipped 0.9 percent to 2,935.64.

The Shanghai Composite has plunged 12 percent from this year’s high on April 18 amid concern growth in the world’s second-largest economy is slowing after the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times since early 2010 to cool inflation. Some investors refer to a drop of 10 percent or more as a correction. The stock gauge has fallen 4.6 percent this year, extending 2010’s 14 percent decline.

Stock Valuations

Companies in the index trade at an average 12.4 times estimates for this year’s profit, the lowest since January 2009, according to weekly data compiled by Bloomberg.

Industrial production growth may have slowed to 13.1 percent in May from 13.4 percent in April, according to a Bloomberg economist survey. Inflation may have accelerated to 5.5 percent from 5.3 percent. Both reports are due tomorrow.

Inflation in June may exceed 6 percent, the China Securities Journal reported today, citing Zhang Zhuoyuan, an economist at the Chinese Academy of Social Sciences. Rapid investment growth and excessive lending are fueling inflation, according to the report.

ICBC slid 0.7 percent to 4.39 yuan. China Construction Bank Corp. (939) lost 0.6 percent to 4.88 yuan. Agricultural Bank of China Ltd. (601288) retreated 0.7 percent to 2.71 yuan.

New loans in May dropped to 551.6 billion yuan from 739.6 billion in April, according to the People’s Bank of China, less than the average 650 billion yuan forecast by economists in a Bloomberg survey.

“Hard-Land” Risk

China faces the risk of a “hard landing” after 2013 as efforts to boost growth through investment lead to excess capacity, Nouriel Roubini, the New York University professor who predicted the financial crisis, said in Singapore on June 11.

China faces a 60 percent chance of a banking crisis by mid- 2013 in the aftermath of record lending and surging property prices, according to Fitch Ratings. Loans worth $2.7 trillion were extended over two years, pushing property prices in China to all-time highs even as authorities set price ceilings, demanded higher deposits and limited second-home purchases.

China’s current challenge is to maintain growth and curb price gains ahead of a leadership change next year, Roubini said. Officials may use administrative steps and price controls as well as raising rates further and allowing currency appreciation if inflation becomes a bigger problem, he said.

Jiangxi Copper Co., China’s largest producer of the metal, fell 1.4 percent to 32.65 yuan, set for its lowest close since June 2. Yunnan Copper Industry Co. (000878) slipped 1.4 percent to 20.55 yuan.

Metals, Oil

Copper last week had its worst weekly performance in five weeks. The metal for three-month delivery on the London Metal Exchange traded at $8,930 a metric ton by 8:07 a.m. Singapore time. Crude oil for July delivery tumbled 2.6 percent to settle at $99.29 a barrel in New York on June 10, the biggest drop since May 11.

Chongqing Changan declined 1.3 percent to 8.65 yuan, set for its lowest close since July 5, 2010. The automaker said it sold 123,773 vehicles in May, down from 128,978 units a year earlier.

China’s auto industry had its recommendation reduced to “neutral’ at Guotai Junan Securities Co., which said higher raw- material costs and price cuts will erode earnings. The brokerage also lowered the nation’s auto-sales growth for this year to 5 percent from 10 percent, analyst Chen Xiwei wrote in a report today. Guotai Junan didn’t say what the previous rating for the industry was.

China’s Shanghai Composite Index may rally to 3,200 in the second half of the year as economic growth may pick up and inflation peak, according to China International Capital Corp.

The investment bank recommends companies with “low” valuation and “stable” earnings growth such as machinery, cement and automakers, analysts led by Hou Zhenhai wrote in a report dated today.

--Irene Shen. Editors: Richard Frost, Darren Boey

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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