China’s Stock Index Drops for Seventh Day on Earnings Concerns

China’s benchmark stock index slid for a seventh day, the longest stretch of losses in 13 months, as concern the nation’s economic slowdown is curbing earnings growth overshadowed an improving outlook for exports to the U.S.

Dongfang Electric Corp. (600875) paced a decline for industrial companies on concern slowing growth will sap demand. Inner Mongolia Baotou Steel Rare Earth Hi-Tech led a gauge of material producers to the steepest loss among industry groups after the U.S., Europe and Japan asked the World Trade Organization to resolve a dispute over China’s limits on rare earth exports. The Shanghai Composite Index is the world’s second-worst performing benchmark index this month, with trading values on the exchange tumbling to the lowest level in five months.

“The economy is still slowing and earnings growth forecasts have further room to be revised downward,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “Weak sentiment will dominate as investors have no idea how slow earnings growth will be.”

The Shanghai Composite (SHCOMP) slipped 2.12 points, or 0.1 percent, to 2,214.82 as of 1:10 p.m. local time. Almost the same number of stocks rose as those that fell. The 7-day drop is the longest since the eight days ended May 30, 2011. The CSI 300 Index (SHSZ300) slipped less than 0.1 percent to 2,446.16. The Bloomberg China- US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, added 1.1 percent in New York yesterday.

The Shanghai Composite has fallen 6.6 percent in June on concern the government isn’t loosening monetary policy quick enough to stem a slowdown. Stocks in the measure are valued at 9.68 times estimated earnings, compared with the average of 17.6 since Bloomberg began compiling the data in 2006.

Industrial Stocks

Thirty-day volatility in the Shanghai Composite was at 14.94 today, compared with this year’s average of 18.32. About 5.1 billion shares changed hands in the gauge yesterday, 41 percent lower than the daily average this year.

Dongfang Electric, China’s second-biggest maker of power equipment, tumbled 6.5 percent to 18.17 yuan, the biggest decline this year. Shanghai Electric Group Co., China’s largest maker of power equipment, lost 2.7 percent to 4.70 yuan.

China’s economy is still slowing, resulting in weaker demand for industrial products, Zhang Yuande, analyst at Founder Securities Co., said in phone interview from Beijing.

Economic data this weekend may show China’s manufacturing is contracting. The Purchasing Managers’ Index compiled by the statistics bureau and logistics federation may drop to 49.8 this month, falling below the dividing line of 50 for expansion and contraction, according to the median estimate of 19 economists in a Bloomberg survey. The figure is due July 1.

Policy Outlook

Inner Mongolia Baotou, China’s biggest producer of rare earth, declined 2.6 percent to 39.10 yuan. The European Union requested the creation of a dispute-settlement panel at the WTO on China’s export restrictions on rare earths, tungsten and molybdenum. China, which supplies 90 percent of the world’s rare earth, has said it curbed exports of rare earths to conserve minerals and protect environment.

“The biggest negative right now for Chinese stocks is that earnings are being cut,” Steven Bell, who manages $600 million in assets as principal portfolio manager at the GLC Ltd., a London-based hedge fund, said by phone yesterday. “So a mild broad-based stimulus is likely and it’s a reason investors may get in there.”

Gansu Qilianshan Cement Group Co. said first-half profit may drop more than 50 percent from a year earlier. China Resources Cement, a Hong Kong-listed producer, fell 4.3 percent after saying yesterday it expects interim profit to fall “significantly.”

Chinese preferential tax policies for corporate pension and pension insurance may be released this year, the China Securities Journal reported today, citing unidentified people. The policy may be in the form of delayed taxation on the pension funds to reduce the amount of tax paid, it said.

Drugmakers Gain

Bank of America Corp. expects China’s central bank to cut lenders’ reserve requirement ratio “in weeks,” economist Lu Ting wrote in a note yesterday. The government may lower the reserve ratio three more times from now until the year-end to stabilize economic growth, Lu wrote.

Xiamen Port Development Co. surged 10 percent to 6.41 yuan. Parent Xiamen International Port Co. said yesterday the government will pay compensation for taking over parcels of land for public development.

A measure of health-care stocks gained 1 percent, the most among the 10 industry groups. Beijing Tongrentang Co. jumped 4.7 percent to 16.84 yuan. Yunnan Baiyao Group Co. (000538) rose 2.4 percent to 58.23 yuan. Investors expect Chinese health-care companies to report improving sales in June, Yang Ying, an analyst at Tebon Securities Co., said yesterday.

Chinese stocks traded in New York rose for a second day yesterday, as Giant Interactive Group Inc. surged the most since April, on prospects the government will take steps to shore up flagging growth in Asia’s largest economy.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., increased 1.4 percent in its second day of gains to $32.63.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

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

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