Emerging Stocks Fall as Chinese Shares Drop Most in Three Weeks

Emerging-market stocks fell, led by the biggest drop in Chinese shares in three weeks, as rising bad loans fueled concern the nation’s economic slowdown will deepen.

The MSCI Emerging Markets Index (VXEEM) retreated 0.3 percent to 974.23. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong lost 1.4 percent as China Life Insurance Co. (2628) and Industrial & Commercial Bank of China (601398) Ltd. declined. Brazil’s Bovespa stock index gained, with homebuilders Brookfield Incorporacoes SA (BISA3) and Gafisa SA (GFSA3) gaining the most.

China’s banking regulator said bad loans increased for a third straight quarter, the longest streak of declines in eight years. China’s “golden years” are gone as growth in the second-biggest economy slows, an official at Rio de Janeiro- based Vale SA (VALE3), the largest iron-ore producer, said yesterday. A report showed manufacturing in the New York area unexpectedly contracted in August for the first time since October.

“The news flow from China is going to deteriorate a great deal and at this point the endgame is uncertain,” John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London, said by phone. “Many emerging-market assets need a high level of activity out of China and without that they are in a lot of trouble. The only thing that can rescue emerging markets is an upturn in the U.S. economy.”

The iShares MSCI Emerging Markets Index (MXEF) exchange-traded fund, the ETF (EEM) tracking developing-nation shares, fell for a third day, dropping 0.1 percent. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, declined 4.1 percent.

Bovespa Slumps

The Bovespa index rose 0.2 percent, led by Brookfield Incorporacoes, which gained 6.1 percent. Gafisa advanced 5.5 percent.

The Federal Reserve Bank of New York’s general economic index fell to minus 5.9 this month from 7.4 in July, indicating U.S. factories are burdened by the global economic slowdown. The median estimate in a Bloomberg survey of economists was 7.0. Readings less than zero signal contraction in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

The MSCI developing-nations measure has climbed 6.3 percent this year, trailing an 8 percent gain by the MSCI World Index. Shares in the emerging-markets index trade at 10.8 times estimated earnings, compared with the average multiple of 13 for the developed-nation gauge, data compiled by Bloomberg show.

China Life

The Philippine peso depreciated 0.6 percent, the most since June, as the government signaled it may take steps to limit the currency’s strength.

China Life Insurance, the nation’s biggest insurer by market value, retreated 3.4 percent, the most since July 23. The company said yesterday after trading closed that premium income in the seven months through July fell 5.6 percent. ICBC, the country’s largest lender by market value, declined 1.1 percent.

Non-performing loans rose by 18.2 billion yuan ($2.86 billion) in the three months ended June 30 to 456.4 billion yuan, the China Banking Regulatory Commission said in a statement on its website today. Bad loans surged at all types of banking institutions, including the largest state-owned lenders, rural banks and foreign banks, the regulator said.

Gome Electrical Appliances Holding Ltd. (493), China’s second- largest electronics retailer, sank 6.9 percent in Hong Kong after the company and rivals Suning Appliance Co. and 360buy.com announced campaigns to cut prices. Haier Electronics Group Co., a washing machine and water heater manufacturer, lost 5 percent.

The extra yield investors demand to own emerging-market bonds over U.S. Treasuries fell nine basis points, or 0.09 percentage point, to 310, according to JPMorgan Chase & Co.’s EMBI Global Index.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Sridhar Natarajan in New York at snatarajan15@bloomberg.net;

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

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