China Stocks Hit By Economic Growth Concerns

China’s stocks fell for a third day after Morgan Stanley and Deutsche Bank AG cut their economic growth forecasts for the Asian country on concern a slowdown in the U.S. and Europe will reduce exports.

Anhui Conch Cement Co., China’s biggest cement maker, declined to the lowest in two months. Poly Real Estate Group Co. and China Merchants Bank Co. dragged down a gauge of banks and developers to its biggest loss in almost two weeks.

“The economic slowdown in China over the next couple of years is something foreseeable as China relies too much on exports and investment and these two drivers cannot sustain growth for long,” said Zhang Qi, an analyst at Haitong Securities Co. in Shanghai. “I still don’t see a big investment opportunity in the stock market.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slipped 17.13 points, or 0.7 percent, to 2,584.13 as of 1:22 p.m. local time, extending a 1 percent decline over the past two days. The CSI 300 Index (SHSZ300) lost 0.8 percent to 2,863.49.

The Shanghai Composite has slid 8 percent this year as the central bank 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 that quickened to the fastest pace in three years last month. The gauge is valued at 11.8 times estimated earnings, matching a record low set in January 2006, according to weekly data compiled by Bloomberg.

Morgan Stanley cut its estimate for China’s 2012 economic growth to 8.7 percent from 9 percent, citing the effects of weaker growth in the U.S. and Europe. Gross domestic product growth will slow to 8.1 percent in the fourth quarter of this year from 9.7 percent in the first quarter, the brokerage said.

Growth Forecasts

Anhui Conch slid 5.1 percent to 24.23 yuan, set for the lowest close since June 13. Gansu Qilianshan Cement Group Co. lost 3.5 percent to 15.12 yuan. Huaxin Cement Co., the Chinese affiliate of Holcim Ltd., retreated 4.4 percent to 26.95 yuan.

China’s economy may grow less than previously forecast in 2011 and 2012 amid the “shock” of a U.S. and European Union slowdown, according to Deutsche Bank. The brokerage cut its 2011 GDP growth forecast to 8.9 percent from 9.1 percent and lowered its 2012 GDP growth estimate to 8.3 percent from 8.6 percent, analysts led by Ma Jun wrote in report. The chance of China’s economic expansion slowing to 7 percent has jumped to 15 percent from 5 percent, the analysts said.

German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected selling euro bonds and expanding a 440 billion-euro ($633 billion) rescue fund after talks between the two on Aug. 16 in Paris. Standard & Poor’s lowered the U.S. rating one level to AA+ from AAA for the first time on Aug. 5.

Financial Stocks

A gauge of financial companies in the CSI 300 slid 0.8 percent. Merchants Bank fell 0.7 percent to 11.84 yuan. China Minsheng Banking Corp., the nation’s first privately owned bank, lost 1.4 percent to 5.62 yuan. Huaxia Bank Co., owned by Deutsche Bank AG, dropped 1.7 percent to 10.38 yuan.

Bad loans at banks will rise to “shockingly high” levels, eroding profits and slowing growth in the world’s second-biggest economy, said Vontobel Asset Management Inc.’s Rajiv Jain, who runs some of this year’s best-performing mutual funds.

China’s local governments are struggling to repay their debt and “frothy” real-estate markets may leave banks exposed to falling prices, Jain said in an Aug. 16 phone interview. While valuations on Chinese banks have dropped to the lowest levels since October 2008, Jain said the shares aren’t cheap enough to buy because the lenders’ leverage is too high and earnings are likely to disappoint investors.

Rate Outlook

Poly Real Estate, China’s second-largest developer by market value, dropped 1.6 percent to 10.87 yuan. China Vanke Co., the biggest, fell 1.5 percent to 8.10 yuan.

China’s July new home prices rose from a year earlier in 68 of the 70 cities monitored by the government, the statistics bureau said on its website today.

“This is the beginning of a downward trend in property prices in China,” said Sun Mingchun, a Hong Kong-based economist for Daiwa Securities Capital Markets. “With more second and third-tier cities introducing purchase restriction policy, sequential price declines will occur in more and more cities in the coming months.”

The nation’s benchmark money-market rate rose the most in four weeks on speculation the central bank will add to this year’s three interest-rate increases as part of efforts to stem gains in living costs.

The seven-day repurchase rate, a gauge of funding availability in the financial system, rose 57 basis points, or 0.57 percentage point, to 3.82 percent as of 11:48 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That’s the biggest increase since July 20.

Earnings Yields

China should place priority on using interest rates as one of its policy tools, the Financial News said today, citing unidentified market participants. The Asian nation will likely further tighten lending for property development in the second half and ease loans to industries targeted for support, it said.

China’s stocks may extend a rebound from a bear market if history is any guide, as rising corporate earnings coupled with slumping equities make them the cheapest relative to government bonds in more than two years.

The earnings yield, or net income divided by stock prices, of the Shanghai Composite and the yield of China’s 10-year government bond. The premium widened to 3.23 on Aug. 9, the most since the start of 2009. When the gap approached that high in July 2010, the Shanghai Composite Index jumped 34 percent in four months. The earnings yield is used by money managers to compare returns among asset classes in making investments.

Hong Kong Partnership

“Stock prices already reflect a worst-case scenario of a recession,” even though first-half profits look quite strong and earnings may grow faster-than-expected in the second half, said Li Jun, a strategist at Central China Securities Co. in Shanghai. “In the long run, stocks are very attractive compared with bonds.”

Hong Kong Exchanges & Clearing Ltd. said it’s in talks with the Shanghai Stock Exchange and the Shenzhen Stock Exchange about forming a possible joint venture.

Areas of business being discussed included the development of new indexes and derivative products on indexes and other securities. No binding agreement has been reached, the Hong Kong exchange said.

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

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