China’s Stocks Drop Most in 10 Weeks on Policy Concerns

China’s stocks fell the most in 10 weeks on speculation the government won’t ease monetary policy as quickly as anticipated and after Citigroup Inc. said the economic growth slowdown will extend into next year.

Poly Real Estate Group Co. plunged 6.7 percent, leading declines for property developers, after Chinese home sales slumped. China Cosco (601919) Holdings Co., the world’s largest operator of dry-bulk ships, dropped the most in seven weeks as Citigroup cited slumping export demand in cutting its growth forecast. Guangzhou Automobile Group Co., which has ventures with Japanese automakers including Toyota Motor Corp., fell to a record low after Haitong Securities Co. said the company will suffer as China boycotts Japanese cars amid a territorial dispute.

The Shanghai Composite Index (SHCOMP) slid 2.1 percent to 2,078.50 as of the close, the most since July 9. The CSI 300 Index (SHSZ300) declined 2.5 percent to 2,258.71. The Shanghai index jumped the most in a week on Sept. 14 on the Fed’s plan to buy mortgage securities to boost growth, known as quantitative easing.

“Investors are concerned about the speed of the economic recovery and are still in a monitoring mode,” Zhang Yanbin, an analyst with Zheshang Securities Co. in Shanghai. “Stocks were dragged down by property stocks today because they are starting to realize that along with the bad data, restrictions on property wouldn’t be removed anytime soon.”

The Shanghai Composite had fallen 5.5 percent this year on concern the government isn’t cutting interest rates or lenders’ reserve-requirement ratios fast enough to counter the slowdown in the economy. It’s valued at 9.5 times estimated earnings, compared with the 17.5 average since Bloomberg began compiling the weekly data in 2006.

‘Irresponsible’

The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong decreased 0.5 percent today. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, added 2.1 percent in New York.

The Federal Reserve’s economic stimulus plan will stoke inflationary pressure, reducing the room for looser policies, according to Industrial Securities, top-ranked for equity strategy research by New Fortune magazine.

China needs to be more cautious with its monetary policies as quantitative easing in the U.S. will create more pressure to control inflation, the official Xinhua News Agency reported, citing Lu Zhengwei, chief economist at Industrial Bank Co.

The Fed said on Sept. 13 it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month, known as quantitative easing.

Liu Mingkang, former chairman of China Banking Regulatory Commission, said in an interview in Beijing on Sept. 15 the latest round of quantitative easing is “irresponsible to the U.S., and also irresponsible to us.” He declined to elaborate.

Growth Outlook

China Cosco led a slump for companies that ship goods, declining 3.4 percent to 3.99 yuan, after Citigroup cut its 2013 economic growth forecast on weak external demand. Cosco Shipping (600428) slumped 4.6 percent to 3.52 yuan.

“China will likely weather the QE3 well given it’s in the early stage of the easing cycle,” Minggao Shen and Shuang Ding, Citigroup analysts, said in a report dated Sept. 14. “The challenge is in the longer term that loose liquidity conditions may reignite the property price up cycle and the economy will continue to be led by property investment growth. The mounting inflation pressure going forward may weigh on China’s rebalancing efforts in the future which are also inflationary.”

Policy Prospects

Citigroup lowered the country’s gross domestic growth forecast to 7.6 percent from 8 percent, according to the report. At least 12 banks and brokerages cut their 2012 gross domestic product forecasts for China so far this month, with UBS AG, Morgan Stanley and Barclays Plc now predicting growth will sink to a 22-year low of 7.5 percent. Citigroup expects two more reserve requirement ratio cuts this year and no rate cuts.

China’s central bank has held off from monetary policy loosening since July 5 when it cut interest rates for the second time in less than a month. It lowered reserve requirements three times between November and May by 50 basis points each time. Inflation that accelerated for the first time in five months in August may limit any monetary easing.

“The A-share market will remain range-bound with a negative bias until we see more stimulus measures to boost the economy,” said Mao Sheng, an analyst for Huaxi Securities Co. in Chengdu. “QE3 will help boost sentiment globally and reduce risk aversion but there’s also concern how inflation will be impacted in the long term.”

Hunan Corun New Energy Co., a nickel foam producer, was the biggest decliner on the Shanghai Composite, plunging 10 percent to 23.45 yuan. Liaoning Baike Group, which is involved in steel product logistics, declined 7.8 percent to 5.30 yuan.

Japan Tensions

Property stocks fell today after China’s home sales declined 4.7 percent in the week ended Sept. 14 in the 58 cities tracked by CEBM Group, a Shanghai-based investment advisory co. That was compared with the previous week.

Average home sales in 58 cities plunged 13.6 percent in the first two weeks of September as compared to the same period last month, according to the statement.

A gauge of property stocks in the Shanghai Composite sank the most since Aug. 2. Poly Real Estate, the second-biggest developer, fell 6.7 percent to 9.71 yuan, the biggest drop since Aug. 2. China Vanke Co. the largest developer, retreated 3.4 percent to 8.06 yuan.

A territorial dispute between China and Japan worsened as Prime Minister Yoshihiko Noda said he’ll demand the Chinese government ensure the safety of Japanese citizens, thousands protested in Chinese cities and Toyota Motor Corp. and Panasonic Corp. reported damage to their operations.

“This is another blow for the global economy,” said Andy Xie, formerly Morgan Stanley’s chief Asia economist. “The costs for China may be less FDI but it could be worse for Japan as the bright spot for the economy has been the auto industry.”

Buy Chinese Stocks

Guangzhou Automobile slid 6.1 percent to 5.53 yuan, the lowest since it started trading in March. The company’s ventures with Toyota and Honda Motor Co. account for a majority of sales and earnings growth will not recover in short time due to Sino- Japanese tensions, Haitong Securities said.

Chinese Vice President Xi Jinping appeared in public for the first time in two weeks, ending an absence that fueled speculation about his health and prospects for succeeding Hu Jintao as the nation’s leader.

Janney Montgomery Scott LLC is advising investors to buy Chinese equities for the first time in two years on prospects Premier Wen Jiabao’s pledge to boost investments and monetary stimulus will support growth in the world’s second-largest economy.

“We’re prepared to add as the evidence accumulates that directionally they’re prepared to become more aggressive to reflate economic activity,” Mark Luschini, the chief investment strategist at Janney Montgomery, the 180-year-old Philadelphia brokerage, said by phone on Sept. 13. “China has been reluctant to act, so these forward-thinking actions have really been the catalyst for the turnabout.”

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., added 4.5 percent last week to $35.19, a one-month high.

To contact Bloomberg News staff for this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

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

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