China’s Stocks Cap Weekly Decline on Inflation; Yuan Advances

Blackstone Said to Win Shanghai Approval for Yuan Investment
Photographer: Andrew Harrer/Bloomberg

China’s stocks fell, driving the benchmark index to its biggest weekly drop in three months, on concern the central bank will increase measures to cool inflation. The yuan touched a 17-year high.

The Shanghai Composite Index lost 0.5 percent to 3,010.52 at the 3 p.m. local-time close. Aluminum Corp. of China Ltd., the nation’s largest producer of the metal, dropped 1.5 percent after reporting lower profit on rising costs. China Vanke Co. and Agricultural Bank of China Ltd. paced declines by developers and banks. China Southern Airlines Co. advanced among airlines on speculation a stronger yuan will pare the value of dollar-denominated debts.

Yuan forwards traded at the biggest premium to the spot rate in more than five months, reflecting speculation the central bank will allow quicker currency gains to help tame inflation. Four interest-rate increases and higher bank reserve requirements have failed so far to curb prices, with the consumer-price index rising 5.4 percent in March.

“The investors are still expecting to see more tightening measures as inflation remains at a high level,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “Faster yuan appreciation would become part of the government’s efforts to curb inflation after the central bank gets close to a ceiling for reserve requirement ratios and interest-rate increases.”

The Shanghai Composite slumped 1.3 percent this week, the biggest decline since the five days ended Jan. 21 and paring the gauge’s annual advance to 7.2 percent. The CSI 300 Index, which tracks A shares traded on the country’s two exchanges, lost 0.5 percent to 3,299.94 today.

‘Great Difficulties’

Chinese companies’ production and operations face inflationary pressures as prices of imported commodities and raw materials rise, the Ministry of Industry and Information Technology said this week. The effects of the price increases cause “great difficulties” for local businesses, it said.

Aluminum Corp. of China, known as Chalco, sank 1.5 percent to 11.17 yuan. The company’s first-quarter profit fell 47 percent from a year ago to 331 million yuan ($51 million) on higher raw-material and fuel costs, according to a statement to Shanghai Stock Exchange. Crude prices have risen 34 percent in the past year.

China’s policy makers may use foreign-exchange tools more frequently than in the past to tame inflation, Ba Shusong, a researcher at the State Council’s Development Research Center, said in Shanghai today. A “moderate” pace of yuan appreciation would be effective in dealing with imported inflation, he said.

Currency Gains

The yuan strengthened 0.4 percent this week to 6.5096 per dollar, its biggest advance since mid-January, according to the China Foreign Exchange Trade System. The currency gained 0.17 percent today and touched a 17-year high of 6.5089, after the central bank set the yuan’s reference rate 0.11 percent stronger at 6.5156 per dollar, the highest level since July 2005.

The stronger yuan lifted airlines and paper producers. China Southern jumped 2.4 percent to 8.93 yuan. Air China Ltd., the largest international carrier, added 1.5 percent to 11.66 yuan. Shandong Chenming Paper Holdings Ltd., the biggest papermaker by market value, rallied 3.8 percent to 8.72 yuan, its highest close since Nov. 11. A rising yuan will cut the cost of imported pulp.

“Papermakers and airlines will benefit the most from the yuan appreciation because of their reliance on imports such as pulp and aircraft,” said Li Lei, an analyst at China Securities Co. in Beijing. “The yuan is going to be a major boost for the companies this year.”

Overseas Debt

A stronger yuan pares the value of dollar-denominated debt built up by Chinese airlines from buying Boeing Co. and Airbus SAS planes. Each 1 percent yuan appreciation will add 600 million yuan to Air China’s earnings, according to Rao Xinyu, head of investor relations, while China Southern said on March 29 every 1 percent gain in the yuan adds 400 million yuan to earnings.

China’s government risks a “hard landing” for the economy by failing to tighten monetary policy quickly enough to cool inflation, according to independent economist Andy Xie. The central bank may raise borrowing costs three or four times during the rest of the year, the former Morgan Stanley economist told Bloomberg Television yesterday.

China Vanke, the largest developer, fell 1.5 percent to 8.55 yuan. Poly Real Estate Group Co. declined 0.7 percent to 13.71 yuan. Agricultural Bank of China lost 1.4 percent to 2.88 yuan. Industrial and Commercial Bank of China Ltd., the biggest lender, slid 0.9 percent to 4.54 yuan.

Housing Curbs

The government is determined to control property prices, the People’s Daily reported today, citing Mu Hong, a vice director at China’s National Development and Reform Commission.

The government has restricted home purchases and raised down payments on second mortgages to cap housing prices, which gained for 19 consecutive months to December and, in March, climbed in 67 of the 70 cities the government monitors.

Chinese banks and developers are “undervalued” and may extend gains as the government contains inflation, said Wang Yawei, who manages the flagship fund of China’s biggest mutual fund company.

The nation’s equities may post “small gains” in the second quarter as the outlook for earnings remains “positive,” Wang said in a quarterly report. “The short-term inflationary factors will be effectively offset by the government’s tightening measures and stay under control.’