China Stocks Fall Most in 3 Weeks on Debt Audit, Slowing Profits

China’s stocks fell the most in three weeks after industrial companies reported slower profit growth and the government ordered a review of state borrowings amid concern potential bad debts may weigh down the economy.

Industrial Bank Co. (601166) and Huaxia Bank Co. slumped at least 2 percent, sending a gauge of financial companies to the biggest loss among industry groups. Anhui Conch Cement Co. (600585) plunged 6.3 percent, dragging down material producers. PetroChina Co., the nation’s biggest energy company, declined the most in two weeks.

The Shanghai Composite Index (SHCOMP) fell 1.7 percent to 1,976.31 at the close. The State Council audit order was “urgent” and the office suspended other projects to work on the review, the People’s Daily said. Concern that loan losses will increase extended the two-month drop in financial shares that was sparked by a cash crunch in the interbank market and economist forecasts for the weakest annual economic growth since 1990.

“The audit may bring concerns to investors that local governments may have amassed a huge amount of debt, which will provide a big drag on the economy and government-led infrastructure construction,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “Industrial companies’ profit numbers are pretty bad. Currently, there are no positive catalysts for the market.”

Photographer: Tomohiro Ohsumi/Bloomberg

A customer looks at an electronic stock board at a securities firm in Shanghai. Close

A customer looks at an electronic stock board at a securities firm in Shanghai.

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Photographer: Tomohiro Ohsumi/Bloomberg

A customer looks at an electronic stock board at a securities firm in Shanghai.

Industrial Profits

Industrial companies’ net income increased 6.3 percent from a year earlier to 502.4 billion yuan ($82 billion), the National Bureau of Statistics said July 27, down from a 15.5 percent pace in May. Profit from main business operations fell 2.3 percent after an 8.8 percent gain the previous month, it said. The Shanghai Composite has dropped 13 percent this year on concern slowing growth will hurt earnings.

The CSI 300 Index declined 2.2 percent to 2,175.97 today, while the Hang Seng China Enterprises Index (HSCEI) retreated 1.2 percent. The Shanghai index trades at 8 times 12-month projected profit, the lowest level in at least five years, data compiled by Bloomberg show. The measure’s trading volumes were 18 percent lower than the 30-day average, while 30-day volatility was at 26.7, near the highest level since December 2010, according to data compiled by Bloomberg.

The State Council requested the National Audit Office to conduct a review of government borrowings, according to a statement yesterday. The first full audit since an initial review two years ago underscores concern expressed by institutions such as the International Monetary Fund, which this month cited risks to the economy from borrowing by local governments and an expansion of non-traditional sources of credit.

Government Audit

“Local-government debt has become a focus in recent years and is a source of concern about China’s growth,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong, who previously worked for the IMF.

PetroChina slid for a fourth day, losing 1 percent to 7.88 yuan. The stock was the biggest drag on the Shanghai Composite today. Anhui Conch, China’s biggest cement producer, tumbled 6.3 percent to 14.09 yuan, the biggest loss since June 13.

A group of financial stocks slumped 2.7 percent, the steepest decline among the CSI 300’s 10 industry groups. Industrial Bank, part-owned by a unit of HSBC Holdings Plc, lost 2.3 percent to 9.13 yuan. Huaxia Bank, partly owned by Deutsche Bank AG, fell 4 percent to 6.19 yuan. China Merchants Bank Co. (600036) slid 2.3 percent to 10.49 yuan.

The government debt audit will bring new uncertainty to the market and hurt banks’ share prices, Guotai Junan Securities Co. wrote in a report.

EU Agreement

Shandong Iron and Steel Co. fell 1.9 percent to 1.56 yuan after saying it was ordered by the government to shut production lines with capacity of 550,000 tons of coke. China last week announced measures to support the economy such as ordering companies in 19 industries to curb overcapacity amid signs growth will ease for a third quarter.

EGing Photovoltaic Technology Co. climbed 1.8 percent to 10.25 yuan. Shanghai Chaori added 5 percent to 2.93 yuan. Zhejiang Sunflower Light Energy Science & Technology Co. (300111) rose 3.3 percent to 12.19 yuan.

European Union and Chinese negotiators reached an agreement to curb EU imports of solar panels from China in exchange for exempting the shipments from punitive tariffs. The accord would set a minimum price for imports of the renewable-energy technology from China. In return, Chinese manufacturers would be spared EU levies meant to counter below-cost sales, a practice known as dumping.

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

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

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