Most Chinese stocks fell as technology and small-company shares dropped on concern that earnings will disappoint, overshadowing a rally for property developers and trainmakers.
Leshi Internet Information & Technology Co., the biggest company in the ChiNext index, and Beijing Originwater Technology Co. slid at least 2.5 percent. Sanan Optoelectronics Co. plunged 8.4 percent as a gauge of technology shares slumped the most among industry groups. China Vanke Co. and Poly Real Estate Group Co., the largest developers, gained at least 2.4 percent.
The Shanghai Composite Index added less than 0.1 percent to 2,059.93 at the close, with five shares dropping for every four that gained. The ChiNext slumped 1.3 percent, paring a rally over the past year to 32 percent. China International Capital Corp. and UBS AG said small-cap companies may come under pressure as their profits may trail analysts’ estimates in the first-half earnings period that begins this month.
“There are concerns about upcoming company earnings,” said Zeng Xianzhao, an analyst at Everbright Securities Co. “The economy didn’t do very well in the first half so investors aren’t optimistic about company earnings. Small-cap stocks are in the limelight as there’s a high chance their growth may not match the valuations they have now.”
The CSI 300 Index slipped 0.1 percent. The Hang Seng China Enterprises Index retreated 0.1 percent in Hong Kong. The Shanghai measure has fallen 2.7 percent in 2014 and trades at 7.6 times projected 12-month profits, compared with 31 times for the ChiNext.
China’s small-company stocks will “lose steam” in the upcoming earnings season, CICC analysts wrote in a note dated today. UBS sees the small-caps rebound coming to an end with interim results likely to “undershoot” expectations, analyst Bo Zhang wrote in a separate note.
After surging at least 20 percent for the biggest gains in China’s stock market last year, gauges of technology, health-care and consumer shares have all lost more than 6 percent. The companies, tied to what analysts have dubbed China’s “new economy,” are now falling in tandem with “old economy” stocks in state sectors such as commodities and finance that fueled growth in the last decade. All 10 industries in the CSI 300 (SHSZ300) sank in the first half, the broadest losses in four years.
The declines suggest investors may be doubting China’s commitment to fostering a shift toward technology and services, putting at risk returns on smaller companies that have been the best in the past two years and the biggest among initial public offerings.
Beijing Originwater Technology slid 5 percent, while Leshi Internet Information & Technology dropped 2.5 percent to the lowest level since June 4. Sanan Optoelectronics fell the most since November 2013 in Shanghai trading.
China Vanke rose 3.4 percent. Poly Real Estate added 2.4 percent. Wuhan city will relax rules on local residents third-home purchases and forbid developers cutting prices ’’maliciously,’’ China Times reported yesterday, citing an unidentified local developer. Two phone calls to the Wuhan housing authority went unanswered. Cities such as Hohhot and Jinan have said they may consider easing home-purchase limits.
“Some local governments could potentially relax policies on the property sector,” said Gerry Alfonso, a trader at Shenyin and Wanguo Securities Co. in Shanghai. “It would be reasonable for the provinces that are seeing a bigger slowdown in economic growth, for instance those that are heavily dependent on the coal industry, to introduce do some fine tuning with property policies.”
Economic growth in the first three months slowed to 7.4 percent from a year earlier, the weakest in six quarters. June lending and money-supply figures due from the PBOC by mid-July and data including second-quarter gross domestic product on July 16 will indicate the impact of government efforts to avert a deeper slowdown.
China’s property market decline will affect banks’ bad loans and the economy in the short term, Song Guoqing, an academic adviser to the People’s Bank of China said at a conference on July 5, while the Xinhua News Agency reported Xia Bin, a former central bank adviser, as saying yesterday that a long-term downturn in China’s property market is “certain.”
China CNR Corp. led gains for industrial stocks, advancing 3.7 percent. CSR Corp. jumped 3.1 percent. The National Development and Reform Commission approved a plan to construct 436 kilometers of inter-city railways with a total investment of about 50 billion yuan ($8 billion), Shaanxi Daily reported July 4, citing the provincial planning body.
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