China’s Stocks Fall to 2-Week Low as Fed Concern Overshadows PMI

China’s stocks fell to a two-week low as concern the Federal Reserve will pare stimulus overshadowed a better-than-estimated manufacturing report.

Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. and Yanzhou Coal Mining Co. led declines for material and energy companies with losses of at least 2.1 percent. Yunnan Baiyao Group Co., a traditional Chinese medicine company, soared 5.7 percent after first-half profit rose 30 percent. ZTE Corp. (000063) advanced 1 percent after its net income jumped 27 percent.

The Shanghai Composite Index (SHCOMP) dropped 0.3 percent to 2,067.12 at the close. The preliminary reading of 50.1 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compares with the 48.2 median estimate in a Bloomberg News survey. Fed minutes showed officials were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying this year.

“Today’s flash PMI once again shows the economy is continuing to stabilize,” Zhang Haidong, an analyst at Tebon Securities Co., said by phone from Shanghai. “However, we may see resistance at around 2,100. With good data, the central bank will not feel pressure to loosen its policy. Concerns about Fed tapering will further exacerbate outflows of funds from China.”

The CSI 300 Index dropped 0.2 percent to 2,303.93, while the Hang Seng China Enterprises Index (HSCEI) advanced 0.3 percent. The Bloomberg China-US Equity Index fell 0.8 percent in New York yesterday.

Flash PMI

The Shanghai index has declined 8.9 percent this year, dragging down its projected 12-month profit to 8.3 times, compared with the three-year average of 10.4. Trading volumes in the index were 11 percent below the 30-day average, according to data compiled by Bloomberg.

The preliminary factory reading compares with a final figure of 47.7 in July. A number above 50 indicates an expansion. The report is based on about 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers. The final reading will be released on Sept. 2.

“A nice big surprise to the markets,” Ting Lu, China economist at Bank of America Corp., wrote in a note to clients. The report “will add evidence to the recovery (or at least stability) in China.”

U.S. policy makers will probably pare their $85 billion in monthly bond purchases at the Federal Open Market Committee’s Sept. 17-18 meeting, according to 65 percent of 48 economists surveyed by Bloomberg Aug. 9-13.

“If you do see the Fed begin to slow its bond purchasing, it will be negative for money flows out of the emerging markets,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which manages $700 million of assets, said by phone yesterday from Lisle, Illinois. “Some of the Chinese names may sell off after strong rallies.”

Rare Earth

Baotou Steel slid 3 percent to 29.20 yuan. The rare earth producer reported a 33 percent drop in first-half profit last week. A gauge of material companies in the CSI 300 fell 1 percent, the most among 10 industry groups. Yanzhou Coal Mining declined 2.1 percent to lead losses for energy companies.

Everbright Securities Co. (601788) dropped 2.8 percent to 9.98 yuan for a three-day loss of 18 percent. The shares were suspended in the afternoon after Xu Haoming resigned as president of the brokerage.

Everbright roiled Chinese stock markets last week with erroneous buy orders. The China Securities Regulatory Commission will examine risks from brokerages’ trading system to prevent trading errors from happening again, according to a statement posted on the CSRC’s website yesterday.

Drug Shares

A gauge of drug companies in the CSI 300 rose 1.5 percent, the most among the industry groups. Yunnan Baiyao surged 5.7 percent to 107.30 yuan. The company’s first-half profit jumped to 936.6 million yuan, while revenue rose 19 percent to 7.31 billion yuan from a year ago, according to a statement posted on the Shenzhen Stock Exchange.

ZTE gained 1 percent to 17.03 yuan. The company’s first-half net income climbed to 310 million yuan. It expects to post net income of up to 440 million yuan in the third quarter, compared with a net loss in the same period a year ago.

Former Politburo member Bo Xilai took bribes worth 21.8 million yuan ($3.6 million), some via his wife and son Bo Guagua, according to charges read out in court in China’s most politically charged case in three decades.

The bribery claims were the first in a list of allegations against Bo, a former commerce minister and Chongqing party secretary, whose trial has followed a pattern in which Chinese political defendants are turned over to the courts only after they’re purged by party leaders.

To contact Bloomberg News staff for 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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