China’s Stocks Fall Most in a Week on Inflation Policy Concern

China’s stocks fell, dragging the benchmark index down the most in a week, amid speculation the central bank will take more steps to curb inflation.

Industrial Bank Co. paced declines by financial companies after the central bank ordered lenders yesterday to set aside more cash in reserve following data showing inflation accelerated in May. China Vanke Co., the nation’s biggest developer by market value, slid 1.2 percent after Standard and Poor’s cut its outlook for real-estate developers.

“The market needs to see some evidence that inflation is going to sort of neutralize, not keep going up,” Hugh Simon, chief executive officer of Hamon Investment Group and co-manager of the Dreyfus Greater China Fund, said in a Bloomberg Television interview in Hong Kong. “You need to see the government saying measures of tightening are working.”

The Shanghai Composite Index lost 24.61, or 0.9 percent to 2,705.43 at the 3 p.m. close. The drop was the biggest since June 9. The CSI 300 Index (SHSZ300) retreated 1 percent to 2,963.12.

The Shanghai gauge rose 1.1 percent yesterday after government data showed that industrial production climbed 13.3 percent in May from a year earlier, exceeding economist estimates. The inflation rate quickened to 5.5 percent in May, the fastest pace since July 2008.

The central bank announced a half percentage point increase in the reserve requirement ratio for banks after the market closed. That added to its 11 reserve-requirement increases and four interest-rate increases since early 2010 to cool inflation. China may raise interest rates “in weeks, if not days,” the China Daily said in an editorial today.

Stock Correction

Concern growth in the world’s second-largest economy is slowing has dragged the Shanghai Composite down 12 percent from this year’s high on April 18. Some investors refer to a drop of 10 percent or more as a correction. Shanghai Composite stocks trade for 12.5 times estimated profit, compared with an average 19.5 times in the past five years and 10.9 times for the MSCI Emerging Market Index, according to data compiled by Bloomberg.

A gauge tracking financial stocks on the CSI 300 Index lost 1.3 percent, the second-biggest drop among 10 industry groups. Industrial Bank fell 2.1 percent to 13.16 yuan. Agricultural Bank of China Ltd. (601288) sank 0.7 percent to 2.71 yuan.

The reserve-requirement increase, which takes effect from June 20, will take the ratio to a record 21.5 percent for the nation’s biggest lenders.

George Soros

The “swift action” to raise the reserve requirement ratio “suggests policymakers’ heightened worries on capital flows and price pressures,” Suan Teck Kin, analyst at UOB-Kay Hian Ltd., wrote in a report dated yesterday. “Given the adverse weather conditions and commodities prices remaining high globally, domestic food prices are expected to stay high for the next few months.”

China has missed its opportunity to stem inflation and may now risk a hard landing, billionaire investor George Soros said yesterday at a conference in Oslo.

The world’s second-largest economy is in a “bit of a bubble,” Soros, 80, said. There are some signs that China is “losing control,” he said.

China Vanke slid 1.2 percent to 8.07 yuan. Gemdale Corp. (600383) retreated 1.6 percent to 6.09 yuan. Financial companies including developers and banks accounted for 42 percent of the CSI 300 Index’s drop today, data compiled by Bloomberg show.

S&P cut its outlook for developers to “negative” from “stable,” because of tightened onshore credit conditions and increasingly restrictive government policies, according to a report from the credit rating company today.

Cement, Steel

The nation’s monetary tightening is unlikely to be “anywhere close to ending,” Dong Tao, a Credit Suisse Group AG economist, wrote in a report. The central bank is likely to raise the reserve requirement for large financial institutions by another 100 basis points by the end of 2011, the report said.

Chinese stocks that are most tied to economic growth such as cement and steel producers may rebound after the economic data released yesterday showed growth of the Asian nation isn’t “on the edge of collapsing,” according to a HSBC Holdings Plc report today.

Laiwu Steel Corp. (600102) surged 6.8 percent to 10.01 yuan, leading advances for steelmakers. Jinan Iron and Steel Co. jumped 7.7 percent to 5.16 yuan.

China may stop using pricing and quantitative tools as frequently as before because tightening may ease, the China Securities Journal wrote in an editorial published on its front page today. Consumer-price growth in May was relatively stable on a month-on-month basis, indicating tightening policies have started to work, the Beijing-based newspaper said.

Xinjiang Guannong Fruit & Antler (Group) Co. led gains by food producers on speculation earnings will be sheltered from inflation-curbing measures. Xinjiang Guannong climbed 4.7 percent to 31.24 yuan. Yuan Longping High-tech Agriculture Co., a seed producer, increased 1.5 percent to 26.90 yuan.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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