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China’s Stocks Decline as Wen’s Speech Boosts Rate Speculation

China Stocks Decline as Wen’s Speech Boosts Rate Speculation
China’s stocks fell after Premier Wen Jiabao said the cabinet is drafting measures to curb rapid price gains, boosting speculation the government may raise interest rates and order price controls to slow inflation. Photographer: Kevin Lee/Bloomberg

China’s stocks fell for a second day, sending the benchmark index into a so-called correction, after Premier Wen Jiabao said the cabinet is drafting measures to curb inflation.

Chongqing Brewery Co., partly owned by Carlsberg A/S, plunged by the 10 percent limit on concern the government will prevent companies from passing on rising costs to consumers. Jiangxi Copper Co. and PetroChina Co. slid at least 1.9 percent on a worsening outlook for metal and energy demand after commodities capped the biggest five-day slide in a year.

“The market is worried that future measures to tighten monetary policy will be more severe,” said Lvwu Mei, vice director of research at Lion Fund Management Co., which oversees about $7.5 billion. “Investors should adopt a more conservative approach given the current market sentiment.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 55.68, or 1.9 percent, to 2,838.86 at the 3 p.m. close, the lowest level in a month. The gauge has lost 10 percent since reaching an almost seven-month high on Nov. 8 as investors speculated the government will raise rates for the second time in a month and institute price controls to combat the fastest inflation in two years. The CSI 300 Index retreated 2.1 percent to 3,103.91 today.

Premier Wen’s comments at a supermarket in the southern city of Guangzhou were broadcast last night on state television. He didn’t elaborate, beyond urging local governments to ensure market supply and order.

A gauge of consumer staples in the CSI 300 slid 5.4 percent, the most since August 2009. Chongqing Brewery, the best performer this year after tripling its stock price, fell 10 percent to 70.81 yuan. Wuliangye Yibin Co., a spirits maker, dropped 3.9 percent to 35.90 yuan.

Turning Bearish

Nomura Holdings Inc. is turning “bearish” on China’s yuan-denominated shares, saying that the government may introduce price controls and “more draconian’” measures to curb accelerating inflation.

“The likelihood of a re-introduction of price controls on food is growing,” Sean Darby, a Hong Kong-based strategist at Nomura, which was ranked first in China research by Institutional Investor magazine in its All-China Research Team poll this year, said in a report today. “The recent run-up in agriculture prices worldwide and signs of hoarding appear to have pushed the authorities to reconsider draconian measures.”

Commodities capped the biggest five-session slide since July 2009 on concern that China will seek to slow its economic growth, curbing raw-material demand in the country that is leading the global recovery. Copper, sugar and rubber futures slumped their daily limit in China, with copper set for its biggest four-day slide since 2008.

Commodities Slide

Jiangxi Copper, the largest producer of the metal, lost 2.9 percent to 35.27 yuan. Yanzhou Coal Mining Co. dropped 1.9 percent to 25.78 yuan. PetroChina, the biggest oil producer, slid 1.9 percent to 11.35 yuan.

The central bank may raise rates due to sustained inflationary pressure, the China Securities Journal said in today’s edition. China may increase borrowing costs for a second time this year as soon as Nov. 19, the newspaper said, citing an unidentified analyst.

The People’s Bank of China boosted its benchmark one-year lending rate on Oct. 19 by a quarter of a percentage point to 5.56 percent, the first increase since 2007. Consumer prices in China gained 4.4 percent in October. The government’s full-year inflation target is 3 percent.

China will introduce measures to control rising food prices, including limits on how much products may be sold for and subsidies, the China Securities Journal reported yesterday, citing an unidentified person. Agriculture futures including soybeans and cotton tumbled by the daily limit today.

Confidence Drops

Nanning Sugar dropped 4.4 percent to 21.35 yuan, the lowest since Oct. 8. Guangxi Guitang, a producer of cane sugar, fell 5.6 percent to 11.33 yuan.

A Chinese consumer confidence index dropped to 104 in the third quarter from 109 in the previous three months, according to a statement from Nielsen Co. and the Chinese statistics bureau’s Economic Monitoring and Analysis Center.

China’s health-care stocks plunged 6.5 percent, the most among the CSI 300’s 10 industry groups, on concerns rallies since mid-year have been excessive given the prospect further measures to tame inflation will slow the economy.

“Health-care stocks have risen too much,” said Li Ying, an analyst at CSC Securities HK Ltd. in Shanghai. The index tracking drugmakers has gained 37 percent since July 1, compared with a 23 percent gain in the CSI 300 Index. Kangmei Pharmaceutical Co. slumped 8.4 percent to 20.16 yuan.

‘Overweight’ Property

A gauge of property developers in the Shanghai Composite rose 0.7 percent. China is unlikely to introduce further property-specific measures as the government shifts its policy focus to controlling inflation, according to a report by Citigroup analysts including Oscar Choi.

The brokerage reiterated its “overweight” recommendation on property stocks, saying that current share prices have factored in “much of the bad news” and that “policy headwinds” will stabilize in the next six months. Poly Real Estate Group Co. added 0.6 percent to 12.31 yuan.

China stocks volatility jumped to the highest in six months, spurring China International Capital Corp. to recommend that investors refrain from buying equities as the government intensifies measures to contain inflation.

“Investors should stay put,” Hao Hong, a Beijing-based global strategist at CICC, the top-ranked brokerage for China research in Asiamoney’s annual survey, wrote in a report. “Inflation risks haven’t been priced in.”

The Shanghai gauge has rebounded 20 percent since reaching this year’s low on July 5 on expectations central banks around the world will inject more cash into their economies to boost growth. The index remains down 13 percent this year after the government raised bank reserve requirements and curbed lending growth to cool the economy.

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