China Stocks Fall for 3rd Day; Material, Technology Shares Drop

China’s stocks fell for a third day after the government ordered cuts to production capacity in 19 industries, while technology companies extended a slump after reaching the highest valuations in more than two years.

BBMG Corp. (2009), Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., and Shandong Chenming Paper Holdings Ltd. (000488) slid at least 1.5 percent after they were cited by the Ministry of Industry and Information Technology in a list of companies that must curb capacity this year. BOE Technology Group Co. slumped for a second day after the company said it planned a share sale that may be China’s largest private placement.

The Shanghai Composite slipped 0.5 percent to 2,010.85 at the close, paring this week’s gains to 0.9 percent. The technology index on the CSI 300 index retreated 1.3 percent after dropping 3.5 percent yesterday. Investors need to be cautious of stocks with smaller market values because of valuations, while the government order shows industrial overcapacity remains a problem that could drag down the economy, said Deng Wenyuan, an analyst at Soochow Securities Co.

The government directive “shows it’s a problem that has not been resolved,” Deng said. “Investors have to be wary” of small caps, he said.

The CSI 300 Index fell 0.6 percent, while the Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong slid less than 0.1 percent. The Bloomberg China-US Equity Index added 2 percent in New York yesterday.

‘Necessary Pain’

BBMG, a cement company, fell 3.3 percent to 4.93 yuan. Baotou Steel dropped 1.5 percent to 23.42 yuan and Shandong Chenming Paper declined 2.3 percent to 3.77 yuan.

Cement, steelmaking, ferroalloys, electrolytic aluminum, copper smelting, cement production and papermaking are among industries required to cut excess capacity, MIIT said in a statement yesterday. Excess capacity must be eliminated by the end of the year, it said.

“This detailed list shows the government is serious in its efforts to restructure the economy and is prepared to tolerate the necessary pain.” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in a note yesterday. “This reinforces our view that aggressive policy stimulus is unlikely in 2012 and that growth should trend down.”

People’s Bank of China Governor Zhou Xiaochuan said that downward pressure on the economy is “relatively big,” according to an article he wrote in the People’s Daily today. He reiterated the nation will continue a prudent monetary policy and keep a “reasonable” amount of money supply and credit. The People’s Daily is published by China’s (SHCOMP) communist party.

Trading Drops

“The new leadership appears focused on implementing a strong foundation to support stable long-term economic growth,” said Brendan Ahern, New York-based managing director of Krane Fund Advisers LLC. Krane has started an exchange-traded fund that tracks companies that will benefit from China’s Five-Year Plan including technology and health care.

A measure of technology stocks in the CSI 300 dropped 1.3 percent for a two-day loss of 4.8 percent, the most since July 8. It’s still the best performer this year with a 32 percent gain, followed by telecom and health-care. BOE declined 1.4 percent today, adding to yesterday’s 8.4 percent slump. The company said it would sell as much as 46 billion yuan ($7.5 billion) in shares to investors to finance expansion.

The company, with a market value of about 29 billion yuan as of yesterday, will issue between 9.5 billion and 22.4 billion shares. At the top end, that would surpass Bank of Communications Co.’s $4.68 billion sale announced in August 2012 to become the largest private placement of shares traded on a Chinese exchange, according to data compiled by Bloomberg.

Trading volumes on the Shanghai Composite were 23 percent lower than the 30-day average, according to data compiled by Bloomberg. The index has fallen 11 percent this year, compared with a 13 percent gain for the MSCI All-Country World Index.

-- Editors: Allen Wan, Darren Boey

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

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