Chinese Stocks Enter Correction as JPMorgan Cuts to Underweight

China’s stocks fell, dragging the Hang Seng China Enterprises Index (HSCEI) down 12 percent from this year’s high, as slowing growth and faster inflation spurred JPMorgan Chase & Co. to downgrade the nation’s shares.

The Hang Seng China index slumped 2.1 percent to close at a three-month low of 10,794.70. The Shanghai Composite Index (SHCOMP) declined 1.7 percent to 2,240.02 and the CSI 300 Index lost 1.5 percent to 2,502.49. JPMorgan cut China to underweight and recommended bearish derivatives tied to the country’s four biggest banks, Adrian Mowat, its chief Asia and emerging-market strategist, wrote in a report today.

SAIC Motor Corp. (600104) led declines by automakers after the nation’s quality watchdog ordered partner Volkswagen AG to recall some vehicles. China Resources Cement Holdings Ltd. sank the most since October 2011 in Hong Kong amid concern over substandard materials. Citic Securities Co. (600030) fell in its longest losing streak on record in Shanghai on speculation Guo Shuqing will be replaced as head of the securities regulator.

“Investors are concerned about the possibility of slowing growth and monetary tightening,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The departure of Guo is perceived as negative for the market as he’s reform-minded and pushed forward innovative measures for the brokerage sector and the stock market.”

The measure of 40 Chinese stocks traded in Hong Kong entered a so-called correction after falling more than 10 percent since Feb. 1. The gauge has lost 5.6 percent this year, compared with a 5.8 percent advance by the MSCI All-Country World Index, and trades at 8 times earnings for the next 12 months, less than its five-year average of 10.3, according to data compiled by Bloomberg.

‘Nasty Combination’

Chinese stocks have tumbled in the past month on concern that an economic recovery will falter as officials take steps to cool the property market and counter risks for banks from an expansion in credit. The Shanghai index has retreated 8 percent from this year’s Feb. 6 peak.

“Growth momentum is now slowing with policy response constrained; a nasty combination,” Mowat wrote. The strategist had a neutral position on China in a Feb. 20 note.

SAIC slid 2.6 percent to 14.66 yuan, the lowest close since Dec. 6. FAW Car Co. (000800) retreated 2 percent to 7.68 yuan. Volkswagen was told to recall vehicles fitted with the direct-shift gearbox system, the regulator said.

Stocks also fell as an unprecedented levy on bank deposits in Cyprus threatens to plunge Europe back into crisis. Europe is China’s biggest export market, making up about 18 percent of the nation’s overseas shipments, according to Shenyin & Wanguo Securities Co.

Violating Rules

China Resources Cement tumbled 7.3 percent to HK$4.32. Two concrete units were ordered to halt business for violating rules, while industry portal xbsn.com reported China was investigating cement companies for monopolistic practices. Anhui Conch Cement Co. dropped 1.8 percent to a four-month low of HK$24.85.

An index of property stocks in the Shanghai Composite lost 1.4 percent, taking its decline since Feb. 5 to 17 percent, as the broadest advance by new home prices since December 2011 spurred concern the government will add news measures to cool gain. China State Construction Engineering Corp. tumbled 4.3 percent to 3.35 yuan.

Property Pressure

Home prices climbed in 62 cities of the 70 the government tracks in February from a year earlier, the statistics bureau said today. Beijing prices jumped 5.9 percent, while they advanced 8.1 percent in Guangzhou. Cities will be forced to introduce new measures as upward pressure on prices will definitely increase in the short term, Credit Suisse Group AG analyst Jinsong Du wrote in an e-mail.

Premier Li Keqiang pledged yesterday to open the economy to more market forces and strip power from the government to achieve 7.5 percent annual growth through 2020 and spread the benefits of the nation’s expansion. He retained People’s Bank of China Governor Zhou Xiaochuan and added sovereign wealth fund chief Lou Jiwei as finance minister after a once-in-a-decade leadership transition.

China faces rising risks of a financial crisis because of excessive credit, elevated property prices, declines in the labor force and limited productivity gains, according to a March 15 report from Nomura Holdings Inc.

Citic Securities, the biggest listed brokerage, retreated 2.1 percent to 12.62 yuan in a ninth day of declines. Haitong Securities Co,, the nation’s second largest, slumped 2.9 percent to 10.83 yuan.

Former Bank of China Ltd. Chairman Xiao Gang will replace Guo as head of the securities regulator, according to a person with direct knowledge of the matter. Since Guo became chairman of the securities watchdog in 2011, the CSRC has expanded foreign investor quotas to buy stocks, cut trading fees and pushed companies to increase dividends.

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

To contact the editor responsible for this story: Allen Wan at awan3@bloomberg.net

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