China’s Stocks Drop, Extending Biggest Weekly Loss in Month; Gree Retreats

China’s benchmark stock index fell, extending its biggest weekly decline in a month, on concern a slowing property market will damp demand for products from cement to household appliances.

Anhui Conch Cement Co., the nation’s biggest maker of the building material, slid to a two-month low. Gree Electric Appliances Inc. (000651) and GD Midea Holding Co., the top two air- conditioner makers, fell more than 3 percent after Citic Securities Co. cut its rating on the industry. Tsingtao Brewery Co. paced gains by consumer-staples producers on optimism earnings will withstand an economic slowdown.

“Domestic demand is still weak because of tightening and the crackdown on the property market and that’ll lead to worries about worsening earnings in the fourth quarter,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “But the period for the tightest monetary policies should be over and we don’t see a further big slump.”

The Shanghai Composite Index fell 1.43 points, or 0.1 percent, to 2,415.13 at the close. About five stocks rose for every three that dropped on the measure. The CSI 300 Index (SHSZ300) added 0.1 percent to 2,609.69. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, slipped 0.1 percent on Nov. 18.

‘Weakness’ to Last

The Shanghai Composite tumbled 2.6 percent last week, the most since the period ended Oct. 21. The gauge has fallen 14 percent this year after the central bank raised interest rates three times and lifted the reserve-requirement ratio to curb inflation that’s near a three-year high. It’s valued at 11.4 times estimated earnings, compared with a record low of 10.8 times on Oct. 21, according to weekly data compiled by Bloomberg.

“Weakness” in China’s stocks may last until the end of the year as the government is unlikely to introduce more “powerful” measures to fine-tune economic policies, according to Citic Securities, the nation’s biggest listed brokerage.

Vice Premier Wang Qishan said he is certain that a global economic recession triggered by the financial crisis will be long term, Xinhua reported. The current world economic situation is “extremely severe,” Wang said. The country should make its prudent monetary policy more “forward looking, targeted and flexible,” Xinhua cited Wang as saying.

Anhui Conch fell 0.8 percent to 17.22 yuan, its lowest close since Sept. 30. Huaxin Cement Co., the Chinese affiliate of Holcim Ltd., lost 0.5 percent to 16.98 yuan. Fujian Cement Inc. dropped 0.9 percent to 9.93 yuan.

Spillover Effect

China’s property market has reached a “tipping point” and the slowdown in the housing industry will have a spillover effect on demand for steel and other construction materials, Zhang Zhiwei, a Hong Kong-based economist at Nomura Holdings Inc., said on a conference call today.

A government report showed last week China’s home prices fell in 33 of 70 cities monitored by the government in October, the worst performance since it expanded property curbs and scrapped the reporting of national average housing data this year.

Gree, China’s largest maker of home air-conditioners, slid 3.2 percent to 17.99 yuan. Midea, the second-biggest publicly traded appliance maker, lost 3.1 percent to 12.11 yuan.

China’s air-conditioner stocks were cut to “neutral” by analysts at Citic Securities. Sales of household air- conditioners dropped 19 percent in October from a year earlier, Hu Yali, an analyst at Citic Securities, wrote in a report today. Air-conditioner exports slid 24 percent, a third consecutive month of declines, according to the report.

Property Curbs

The central government may not loosen credit for the property market and limits on home purchases until the third quarter next year, Xinhua reported, citing a report published by Renmin University of China.

Residential property accounted for 6.1 percent of the country’s gross domestic product last year, according to Citigroup Inc.

A group of 23 consumer staple stocks gained 0.6 percent today, the second-best performer among the CSI 300’s 10 industry groups. Tsingtao Brewery, China’s second-biggest brewery by volume, rose 3.1 percent to 36.09 yuan. Yonghui Superstores Co. advanced 4 percent to 33.03 yuan.

The biggest monthly drop in Chinese household deposits since at least 2007 is helping keep borrowing costs for banks at a record high, adding pressure on policy makers to free up cash with a cut in reserve requirements.

Interbank Lending

Household deposits fell by 727.2 billion yuan in October and have declined 1.1 percent since June 30, central bank data show. That’s caused financial institutions to raise the six- month cost for interbank lending 18 basis points this quarter to 5.48 percent, the highest level since the data started in 2006, according to the National Interbank Funding Center in Shanghai.

“China needs to cut the required reserve ratio to improve liquidity in the system, enabling banks to have more funds to lend out,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., which expects a 3.5 percentage point cut in the reserve ratio to 18 percent next year. “Deposit outflow will remain an issue in China. The one-year deposit rate is currently 3.5 percent while the inflation rate is about 5.5 percent.”

Yuan holdings at Chinese banks fell for the first time since December 2007, fueling speculation capital outflows will take pressure off policy makers to speed up gains in the currency.

Financial institutions’ yuan positions declined a net 24.9 billion yuan ($3.9 billion) in October, according to a statement on the People’s Bank of China website. Economists watch the numbers for signs of inflows or outflows of so-called hot money.

--Zhang Shidong. Editors: Richard Frost, 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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