China’s Stocks Decline to 6-Week Low on Manufacturing Slowdown, Inflation

China’s benchmark stock index fell to a six-week low, as economic reports signaled the global recovery is stalling and investors speculated the central bank will raise interest rates this month to tame inflation.

Industrial & Commercial Bank of China (601398) Ltd. led declines for lenders after a Xinhua News Agency website said China may boost borrowing costs around Aug. 10. Jiangxi Copper Co. and Zhuzhou Smelter Group Co., China’s biggest producers of copper and refined zinc, retreated more than 1 percent on speculation a slowing global economy will curb demand for metals.

“Inflationary pressure is still big and the July inflation number could still be high,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “The government has already set a tone that controlling prices is its priority for the second half so any easing of tightening policies is unlikely.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, lost 24.52 points, or 0.9 percent, to 2,679.26 as of the 3 p.m. local time close, the lowest close since June 22. The measure is valued at 12.3 times estimated profit, the lowest since October 2008, according to weekly data compiled by Bloomberg. The CSI 300 Index (SHSZ300) fell 0.7 percent to 2,956.38.

The Shanghai measure has slumped 12 percent from this year’s high set on April 18 on concern growth in the world’s second-biggest economy is slowing, fueled by reports showing slumping manufacturing growth. The Purchasing Managers’ Index slipped to 50.7 in July from 50.9 in June, the China Federation of Logistics and Purchasing said yesterday. The PMI from HSBC and Markit Economics fell to its lowest level since March 2009.

The central bank has raised interest rates five times and ordered lenders to set aside more cash as deposit reserves 12 times since the start of 2010 to contain inflation, which quickened to the fastest pace in three years in June.

Inflation Outlook

ICBC, the nation’s biggest listed lender, slid 0.9 percent to 4.20 yuan. China Construction Bank Corp. (601939), the second largest, fell 0.9 percent to 4.67 yuan. Bank of China Ltd. (3988) lost 0.7 percent to 3.03 yuan.

China may raise rates around Aug. 10, Xinhua08.com, Xinhua’s financial services website, said yesterday, citing its own research. Consumer price index growth in July may hit 6.3 percent, according to the report. Inflation may have accelerated to 6.5 percent in July, Zhu Jianfang and Sun Wencun, analysts at Citic Securities Co., wrote in a report today. The figure is scheduled to be released Aug. 9. The nation’s inflation rate rose to 6.4 percent in June.

China’s inflation pressure is still high and rising prices are the most prominent problem facing its economy, the Financial News said in a front-page commentary by an unidentified writer. The newspaper is a publication of the central bank.

No Policy Relaxation

The central bank said yesterday it’s too early to relax monetary policy, citing “strong” inflation expectations and the foundation for stabilizing prices isn’t “solid.”

A 48-member measure of material stocks slumped 1.1 percent today, the second most among the CSI 300’s 10 industry groups.

Jiangxi Copper, China’s biggest producer of the metal, lost 2.3 percent to 35.75 yuan. Tongling Nonferrous Metals Group Co., the second biggest, slid 3.5 percent to 26.43 yuan. Zhuzhou Smelter slumped 1.4 percent to 16.38 yuan.

A report showed U.S. manufacturing expanded in July at the slowest pace in two years, indicating the industry that’s been driving the economic expansion is starting to weaken. The Institute for Supply Management’s factory index fell to 50.9 last month from 55.3 in June. Economists projected the index would drop to 54.5, according to the median forecast in a Bloomberg News survey.

U.S. Debt

The Standard & Poor’s 500 Index lost 0.4 percent yesterday, falling for a sixth day as slower-than-forecast growth in manufacturing erased a rally triggered by speculation lawmakers would raise the federal debt ceiling. The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend.

The Stoxx Europe 600 Index slid 10 percent from this year’s high yesterday, becoming the first major region to enter a so- called correction, as falling Spanish and Italian bonds showed the debt crisis is spreading.

“Economic data from around the world seem to suggest that global growth is slowing and that’ll sour sentiment especially when there’s still uncertainty over the debt crisis in Europe,” said Wei Wei, an analyst at West China Securities Co. in Shanghai.

China Stocks

China’s stocks may perform better than counterparts elsewhere in Asia should the debt crises in Europe and the U.S. worsen, according to Credit Suisse Group AG, which said the nation’s loans from the two regions are of “virtual irrelevance” in the world’s second-largest economy.

The Shanghai Composite rose 2.9 percent in the six months after the collapse of Lehman Brothers Holdings Inc. in September 2008, the only one among 10 major Asian stock gauges to advance. India’s dropped 42 percent, Taiwan’s slid 25 percent and South Korea’s fell 24 percent, data compiled by Bloomberg show.

“It seems reasonable to assume that in a scenario of a major U.S. and/or euro-zone cash crunch the relative performance of Asia’s markets would be influenced in part by the extent of Western ownership of debt and equities in the region,” Robert Prior-Wandesforde, an economist at Credit Suisse, wrote in a report. “China’s economy and financial system is also more immune than most to U.S./Europe-led financial market turmoil.”

--Zhang Shidong. Editors: Allen Wan, Richard Frost

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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