China Stocks Plunge Most Since August on Property Curbs, Europe

An investor monitors stock boards in Shanghai
An investor eats her lunch in front of stock boards at a securities trading firm in Shanghai. Photographer: Kevin Lee/Bloomberg

China’s stocks plunged, driving the benchmark index to the biggest loss since August, on concern government steps to cool the property market and European austerity measures will hurt economic growth.

China Vanke Co. paced declines by developers after Premier Wen Jiabao said the government will “decisively” contain gains in home prices. Jiangxi Copper Co. lost 6.3 percent after commodity prices tumbled and the Ministry of Commerce said the euro’s decline is pressuring exporters. Guangzhou Shipyard International Co., which got more than half of last year’s sales from Europe, slumped 8.4 percent.

“Investors are increasingly fearful of policy miscalculation on China’s part,” said Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $21 billion in the region. “With the European crisis, the risk is that China over-tightens and the economy goes into a hard landing.”

The Shanghai Composite Index dropped 136.69, or 5.1 percent, to close at 2,559.93, the lowest since May 4, 2009. Today’s decline is the biggest since Aug. 31, when the gauge fell 6.7 percent on concern a slowdown in lending growth would slow economic growth. The CSI 300 Index retreated 153.31, or 5.4 percent, to 2,714.72.

The Shanghai index has lost 22 percent this year, the world’s fourth-worst performer among the 93 gauges tracked by Bloomberg, on concern the government will keep tightening monetary policy to contain inflation and avert asset bubbles. The measure on May 11 entered a bear market after falling 21 percent from its Nov. 23 high.

Economic Growth

Equity losses have dragged valuations on the Shanghai index to 19.1 times reported earnings, compared with the multiple of 37 times in July 2009, according to weekly data compiled by Bloomberg.

China International Capital Corp. on May 10 cut its estimate for China’s economic growth this year to 9.5 percent from 10.5 percent, citing property tightening measures and overseas “uncertainties.” The economy expanded 11.9 percent in the first quarter from a year earlier.

Vanke, the country’s largest listed developer, slid 5.3 percent to 6.92 yuan. Poly Real Estate Group Co. lost 7.3 percent to 10.10 yuan, capping a 41 percent loss this year. An index tracking 34 property stocks on the Shanghai Composite plunged 6.2 percent, set for its lowest close since March 2009.

Premier Wen said the government will “decisively” contain excessive increases in housing prices in some cities and curb growth of industries with overcapacity, the official Xinhua News Agency reported May 15. China should keep the strength of macroeconomic controls “reasonable” and boost policy coordination, Xinhua said, citing Wen.

Record Gains

Property prices jumped a record 12.8 percent in April from a year earlier and consumer prices rose 2.8 percent, the fastest pace in 18 months, even after the government raised bank reserve requirements three times this year and increased downpayments on homes to curb asset bubbles.

The National Development and Reform Commission is currently drafting “more stringent” rules for the property market, the website reported, citing unidentified people.

Prices of reinforcing steel bars used in construction fell 4.7 percent last week, the most in at least eight months, according to data compiled by Beijing Antaike Information Development Co.

China’s property market is “healthy” and not in a bubble because sales are driven by cash rather than debt, Andy Rothman, China Macro strategist for CLSA Asia-Pacific Markets, said at a forum in Shanghai today.

Europe Concerns

Jiangxi Copper slumped 6.3 percent to 28.73 yuan, the most since Nov. 27. PetroChina Co., the nation’s largest energy producer, retreated 3.8 percent to 10.73 yuan. Baoshan Iron, the biggest steelmaker, declined 5.8 percent to 6.23 yuan. Angang Steel Co. fell 6.9 percent to 7.92 yuan.

Crude oil fell for a fifth day, losing as much as 2.5 percent to $69.82 a barrel, copper, aluminum and zinc plunged as much as 4.9 percent, while gold increased 0.8 percent to $1,242.45 an ounce.

“Investors are worried that more property tightening is on the way even as Europe throws up more uncertainties about the global economy,” said Michelle Qi, a Shanghai-based portfolio manager at Bank of Communications Schroders Fund Management Co., which oversees about $6.5 billion.

European finance ministers return to Brussels today a week after agreeing to a $1 trillion financial lifeline for the euro region. Ministers are under pressure to show they can reduce deficits fast enough to satisfy investors and then police budgets effectively once targets are met.

Export Market

China is concerned that the debt crisis facing Europe may delay the global economic recovery, Ministry of Commerce spokesman Yao Jian told a regular briefing in Beijing today. Europe is China’s biggest export destination, making up 20 percent of its total overseas sales.

Among companies with sales in Europe, Guangzhou Shipyard fell 8.4 percent to 20.64 yuan, the most since Aug. 31.

The euro fell to the lowest level in more than four years against the dollar after European Central Bank President Jean-Claude Trichet called for a “quantum leap” in the way euro-area nations set their budgets.

China’s growth is “strong” and a leading economic indicator rose “sharply” in March, The Conference Board said today, publishing the data for the first time.

‘Front Loading’

Bill Adams, a Beijing-based economist for The Conference Board, said that the “front-loading” of real-estate projects ahead of government controls on the sector may have contributed to the gain. The economic expansion is “unlikely to accelerate further through the summer months,” he said.

China’s recent stock market declines shouldn’t be blamed on index futures, China Securities Journal cited Wang Lianzhou, former deputy director of National People’s Congress’ financial and economic committee, as saying.

Investor Mark Mobius said May 14 the start of derivatives trading in China may be adding pressure to the stock market. Futures, or agreements to buy or sell the CSI 300 Index at a preset value, began trading on the China Financial Futures Exchange in Shanghai on April 16, while margin trading and short selling was introduced March 31.

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