China’s Stocks Slump to One-Week Low on Interest-Rate Concerns

China’s stocks fell, driving the benchmark index to the lowest in a week, after a legislator said the central bank should keep raising interest rates and on the prospect money-market rates will remain near record highs.

Poly Real Estate Group Co. and Agricultural Bank of China Ltd. led declines among financial companies. Zijin Mining Group Co., the nation’s biggest gold producer, slid 3.4 percent on speculation President Barack Obama’s plan to cut the U.S. deficit will reduce the bullion’s appeal.

“There are a lack of catalysts to support the rally and everything positive such as expectations about policy easing seems to be priced in,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “Inflation is still a big issue and where it’s heading will affect stocks.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 8.50 points, or 0.3 percent, to 2,788.48 as of 1:13 p.m. local time, set for the lowest close since July 12. The CSI 300 Index (SHSZ300) slid 0.4 percent to 3,082.06.

The Shanghai gauge has lost 0.7 percent this year on concern government’s effort to curb inflation will hurt economic growth. The central bank has raised rates five times and the reserve-requirement ratio 12 times since the start of 2010 to stem inflation. Consumer prices rose 6.4 percent in June, the fastest pace in three years, as food costs increased. China’s one-year bank deposit savings rate is 3.5 percent.

Tighter Liquidity

China should raise borrowing costs to correct the current situation in which real interest rates are negative, He Keng, a vice chairman of the financial and economic affairs committee of the National People’s Congress, said in Beijing today. The government should adopt tighter fiscal policy to help curb inflation, He said.

“The biggest risk in Asia is China’s banking system,” Robert Horrocks, chief investment officer at Matthews International Capital Management LLC, said in an interview on Bloomberg Television today from Hong Kong.

AgriBank, the nation’s fourth-largest by assets, slid 0.4 percent to 2.71 yuan. China Merchants Bank Co. dropped 0.3 percent to 12.76 yuan. Poly Real Estate, China’s second-largest developer by market value, fell 0.4 percent to 10.95 yuan.

China’s benchmark money-market rate will remain at about a record high this quarter as the central bank drains cash from the financial system to damp inflation, according to a survey of bond analysts.

The seven-day repurchase rate, a measure of interbank funding availability, will average 4.0 percent, based on the median of 12 estimates in a Bloomberg poll. That’s almost double the 2.1 percent recorded in the same period of 2010 and compares with a second-quarter level of 4.2 percent that was the highest in data going back to 2004.

Sell China Stocks

Record-high Chinese bank reserve requirement ratios and three-month China Interbank Offered Rates that are above the April 2008 peak signal “wider risk spreads, a dramatic compression in the term structure of interest rates and slower liquidity growth,” according to Michael Darda, chief market strategist for MKM Partners LP.

Investors should be cautious on energy, material and industrial stocks as the global economy has yet to “see the full brunt” from China’s tightening measures, he said.

“The Shanghai Composite Equity Index has risen nearly 7 percent since late June, with a growing chorus expecting Chinese equities (and industrial commodities) to continue rallying during the second half of 2011,” he said in a report. “We are happy to take the other side of this trade.”

Central bank adviser Xia Bin said consumer prices will remain a significant issue in the long term and property-market controls have not been very effective, the People’s Daily reported. Real estate and local government debt problems may lead to an economic crisis if not properly handled, he said.

Gold Producers

Zijin Mining slumped 3.4 percent to 5.63 yuan. The shares tumbled as much as 8.4 percent in Hong Kong after a shareholder offered a 5.6 percent stake for sale at a discount.

Six Zijin senior employees pleaded guilty to negligence charges related to a dam collapse that killed 22 people in Guangdong province, Xinhua News Agency said yesterday, citing court proceedings.

Zhongjin Gold Corp., the country’s second-largest bullion producer by market value, lost 3.7 percent to 29.15 yuan. Shandong Gold Mining Co., the third biggest, retreated 2.6 percent to 49.90 yuan.

President Barack Obama endorsed a $3.7 trillion debt- cutting plan by a bipartisan group of senators that would combine tax increases and spending cuts, saying it could end a congressional deadlock over raising the U.S. borrowing limit. The news spurred optimism that lawmakers will reach an agreement that will help the nation avoid default.

Drugmakers Drop

A 21-member measure of health-care stocks fell 0.9 percent today, the most among the CSI 300’s 10 industry groups. It rose to the highest in almost three months on July 15 after the Shanghai Securities News said the government may announce a biomedical development plan by the end of the month. Beijing Tongrentang Co., a retailer of Chinese medicine, slid 2 percent to 18.60 yuan.

Chinese measures to curb property-price gains and tame inflation are “at or close to the peak,” bolstering the outlook for stocks, said JPMorgan Asset Management’s Howard Wang.

“We think inflation is peaking now and that it will ease off,” Wang said. “All things equal, that should make a better environment for Chinese equities.”

The Conference Board index rose 0.5 percent to 155 in May, the group said on its website today, citing a preliminary reading. The gauge is designed to capture prospects over the coming six months. April’s index was revised to a 0.1 percent gain from a previous 0.2 percent increase.

--Zhang Shidong. Editors: Allen Wan, Matthew Oakley

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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