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China Stocks Fall to 2-Month Low on Policy Tightening Concerns

China’s stocks fell, driving the benchmark index down to the lowest in almost two months, as inflation concerns and a think-tank report saying property prices are inflated boosted prospects for more policy tightening.

China Vanke Co. and Poly Real Estate Group Co. slid more than 3 percent after the Chinese Academy of Social Sciences said new homes in major cities are “overpriced” by an average of 30 percent. SAIC Motor Corp. and Chongqing Brewery Co. paced a retreat for consumer companies after Morgan Stanley said it recommended investors “underweight” the industry on valuations.

“For the short- and medium-term, the market is going to fluctuate with downward pressure as it’s a policy-driven market,” said Zhou Xi, a strategist at Bohai Securities Co. in Tianjin. “Investors are prepared to see a higher or even peak inflation rate for November.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 37.60 points, or 1.3 percent, to 2,810.95 at the 3 p.m. close, the lowest since Oct. 11. The CSI 300 Index fell 1.5 percent to 3,123.37.

Yesterday’s move by the statistics bureau to bring forward the release of economic data, including inflation, to Dec. 11 instead of Dec. 13 signal an interest-rate increase may be imminent, said Glenn Maguire, chief Asia economist at Societe Generale SA.

A gauge of developers on the Shanghai Composite fell 1.8 percent, the most since Nov. 26. China Vanke, the nation’s largest developer, lost 3.8 percent to 8.17 yuan. Poly retreated 4.5 percent to 12.13 yuan.

Property Prices

Prices of new properties in Fuzhou in the southeastern seaboard province of Fujian were the most inflated, the Shanghai Daily reported, citing the Chinese Academy of Social Sciences’ annual housing report. New homes in seven out of the 35 cities were more than 50 percent overpriced, according to the report.

The Shanghai gauge has lost 11 percent since reaching a high on Nov. 8, extending this year’s loss to 14 percent, on concern tighter monetary policy will slow growth in the world’s fastest growing major economy.

Bank of Beijing Co. fell 2.7 percent to 1.57 yuan today and Huaxia Bank Co. declined 2.2 percent to 10.91 yuan. China Construction Bank Corp., the nation’s second largest lender, slipped 1.7 percent to 4.70.

China’s reserve ratio for the nation’s biggest lenders may rise to 20 percent next year from 18.5 percent currently, Maguire said in Hong Kong today. Banks were asked to set aside larger reserves twice last month after inflation reached 4.4 percent in October, the most since September 2008. China also raised borrowing costs in October for the first time since 2007 to cut money supply in the banking system.

Inflation Outlook

This coming weekend’s inflation data may show consumer prices climbed 4.7 percent in November, according to the median estimate of 29 economists surveyed by Bloomberg. Prices may have climbed between 5 percent and 5.2 percent last month, according to a research note from Sinolink Securities Co.

A gauge of consumer staples declined 2.1 percent on the CSI 300. The gauge trades at 41.4 times reported earnings, compared with 18.5 times for the broader measure. An index tracking consumer discretionary companies dropped 2.5 percent.

Morgan Stanley has an “underweight” position on consumer-related stocks because of “high” valuations and earnings expectations, according to yesterday’s report by analysts led by Jerry Lou. Investors should switch to so-called cyclical stocks, such as banks, developers, steelmakers and energy producers, they said.

SAIC lost 3.2 percent to 15.99 yuan before the release of November auto sales. Chongqing Brewery, partly owned by Carlsberg A/S, fell 10 percent to 56.97 yuan.

Rail Boost

China Railway Group Ltd. and China CNR Corp. led gains by rail-related stocks as investors speculated the world high-speed rail congress in Beijing will spur new orders.

China Railway Group, the nation’s biggest construction company by total assets, rallied 5.9 percent to 4.65 yuan. China CNR rose 5.2 percent to 7.09 yuan. CSR Corp. jumped 7.3 percent to 8.25 yuan. CNR and CSR are the country’s two biggest railcar makers.

“With big orders for high-speed railways at home and abroad, railway-related companies are one of the few sectors with solid growth prospects against a backdrop of an uncertain macro-economic environment,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million.

The country formed ventures with Alstom SA and Bombardier Inc. this week to help develop new rail systems. The government plans to spend as much as 4 trillion yuan ($600 billion) expanding rail coverage, the China Securities Journal reported yesterday, citing an unidentified person.

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