China’s H Shares Decline Most in Two Months as Tencent Retreats

Chinese stocks dropped, sending mainland companies in Hong Kong to the biggest decline in two months, as falling producer prices signaled weakening economic growth and technology shares sank on valuation concerns.

Anhui Conch Cement Co. (600585), China’s biggest cement maker, slid the most since 2011 in Hong Kong. The ChiNext index, which has a 32 percent weighting in smaller technology stocks, lost 1.3 percent after U.S. peers tumbled yesterday on concern valuations are too high. Tencent Holdings Ltd. (700), Asia’s biggest Internet company, dropped 6.8 percent.

The Hang Seng China Enterprises Index (HSCEI) slid 1.9 percent to 10,228.42 at the close and the Shanghai Composite Index (SHCOMP) dropped 0.2 percent. China’s producer price index fell 2.3 percent in March, adding to signs of weak demand in the second-largest economy after data yesterday showed shrinking trade. Technology shares have been among the biggest losers from the U.S. to Hong Kong during the past month as investors worldwide retreat from the industry.

“The sell-off in the U.S. market is pressuring local stocks, particularly those high-valuation small-caps,” said Dai Ming, a money manager at Hengsheng Hongding Asset Management Co. in Shanghai, which oversees about $193 million. “The weak producer prices are a reflection of the current macro-economic situation as demand is lackluster now.”

The CSI 300 Index retreated 0.1 percent to 2,270.67. The Bloomberg China-US Equity Index, a measure of the most-traded U.S.-listed Chinese companies, fell 0.9 percent yesterday.

Inflation Data

The discount between mainland and Hong Kong shares narrowed for a second day. Stocks rallied in both markets yesterday after China said it would allow a combined 23.5 billion yuan ($3.8 billion) of daily cross-border trading in equities.

The Shanghai Composite is valued at 7.8 times 12-month projected earnings, compared with the five-year average multiple of 12, according to data compiled by Bloomberg. Trading volumes in the index were 19 percent above the 30-day average today, while those on Hong Kong’s Hang Seng Index were 26 percent higher.

Anhui Conch tumbled 7.2 percent in Hong Kong and 3.5 percent in Shanghai. China Shenhua Energy Co. (601088), the nation’s largest coal producer, lost 2.4 percent in Hong Kong. China Petroleum & Chemical Corp., Asia’s biggest oil refiner, also known as Sinopec, fell 1.5 percent.

U.S. Sell-Off

The drop in the producer-price index compared with the median estimate of economists for a 2.2 percent fall and extends the longest stretch of declines since a 31-month slide that started in 1997. The consumer price index rose 2.4 percent in March from a year earlier, the Beijing-based National Bureau of Statistics said today, in line with the median estimate of 55 analysts surveyed by Bloomberg News.

China’s economy probably grew 7.4 percent last quarter from a year earlier, according to analysts surveyed by Bloomberg News in March, down from an earlier median estimate of 7.6 percent.

Shanghai Ganglian E-Commerce Holdings Co. led declines for ChiNext companies in Shenzhen, retreating 5.7 percent. Shanghai Kingstar Winning Software Co. (300253) lost 5.3 percent.

The ChiNext, which jumped 83 percent last year, is valued at 56 times reported earnings, compared with the multiple of 11 times for the Shanghai Composite. The Nasdaq Composite Index, dominated by U.S. technology stocks, tumbled 3.1 percent yesterday.

Consumer Shares

A sub-index of consumer-staple stocks in China’s CSI 300 advanced 1.6 percent, the most among the 10 industry groups. Kweichow Moutai Co., China’s biggest liquor maker by market value, added 3.9 percent. Wuliangye Yibin Co. (000858), the second largest, gained 4.1 percent. Henan Shuanghui Investment & Development Co., the country’s biggest pork processor, rose 1.9 percent.

Mainland-listed food and beverage companies that are industry leaders and have stable earnings growth and cash flow will enjoy valuation expansion after yesterday’s announcement of a tie-up between the Shanghai and Hong Kong exchanges, analysts led by Jin Feng at Shenyin & Wanguo Securities Co. wrote in a report today.

Under the proposal, wealthy individuals will be allowed to buy Hong Kong equities through the Shanghai exchange, broadening their investment options from a limited number of funds. The change will boost brand-name Chinese companies whose shares trade only in Hong Kong, while giving arbitragers more scope to narrow price differences between dual-listed stocks, said Bank Julius Baer & Co. and Invesco Ltd.

“It will give the market more confidence that the government is serious about opening up,” said Kelvin Wong, a Hong Kong-based analyst at Julius Baer, which has about $287 billion under management. “Our recommendation is to look for good fundamental names that are listed exclusively” in Hong Kong, he said.

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

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

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