China Stocks Fall in Longest Losing Streak Since December 2008

China’s stocks fell for an eighth day, the longest losing streak since December 2008, on concerns interest rates will rise, a property tax may be expanded nationwide and power shortages will cut production capacity.

China Vanke Co., the nation’s largest publicly traded developer, dropped to a 10-month low after the Oriental Morning Post said the government may raise borrowing costs next month. Sany Heavy Industry Co. slumped for a ninth day, leading declines for industrial companies, on speculation power shortages will cut production capacity. Industrial and Commercial Bank China Ltd. surged 3.9 percent on the prospect the shares are undervalued after this year’s stock market slump.

“The market is deluged with negative news,” said Tu Jun, a strategist at Shanghai Securities Co. “Investors seem to have reached consensus that stocks are heading lower while the tightening environment continues.”

The Shanghai Composite Index slipped 3.6 points, or 0.1 percent, to 2,706.36 at the 3 p.m. close, erasing a gain of as much as 0.7 percent and capping an eight-day, 5.8 percent retreat. More than four stocks fell for each that rose on the gauge today. The CSI 300 Index declined 0.3 percent to 2,954.51.

Shares traded in Shanghai are valued at 15.3 times reported earnings, which is 9 percent lower than the average multiple seen during the previous three “troughs” in January 1996, November 2005 and October 2008, Credit Suisse Group AG analysts led by Sakthi Siva wrote in a report.

Interest Rates

The Shanghai Composite has plunged 11 percent from this year’s high on April 18, a sign to some investors that the market has entered a correction. The gauge has dropped 3.6 percent this year on signs growth in the world’s second-largest economy is slowing after the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times to cool inflation.

China Vanke fell 1.3 percent to 7.80 yuan, the lowest close since July 21. Poly Real Estate Group Co. declined 3.3 percent to 9.51 yuan.

China’s June consumer prices may increase about 5.7 percent from a year earlier and interest rates will likely be raised next month, the Oriental Morning Post reported today, citing Li Xunlei, chief economist at Guotai Junan Securities Co. A property tax may be expanded nationwide after revising a trial program imposed on the cities of Chongqing and Shanghai, Xinhua News Agency reported yesterday, citing Chongqing Mayor Huang Qifan. Construction of large homes fell, and luxury home sales and prices declined after Chongqing started the trial on Jan. 28, Xinhua cited Huang as saying.

Fund Holdings

China’s 383 mutual funds reduced their holdings of stocks by 3.04 percentage points to 72.1 percent of their combined portfolios last week from the previous week, the Shanghai Securities News reported today. The mutual funds cut their holdings on concern tighter liquidity and slowing economic growth will hurt the market, the newspaper reported, citing a report by Guodu Securities Co.

Sany Heavy Industry Co. fell 2.5 percent to 15.32 yuan, its lowest close since Feb. 24. China Shipbuilding Industry Co. slumped 3 percent to 11.03 yuan.

China’s power producers may curb operating hours to reduce financial losses even as the nation faces an electricity shortage that may be the worst on record.

“We expect a continuous deceleration in utilization hours at coal-fired power plants, worsening the power shortage,” Helen Lau, a Hong Kong-based analyst at UOB-Kay Hian Ltd., wrote in an e-mailed note on May 27. Average net profit margins in the first quarter were “razor thin” at less than 1 percent, with about half the plants posting losses, she said. Coal-fired generators produce about three-quarters of China’s power. Coal has risen more than 30 percent since the government last increased electricity tariffs nationwide in November 2009.

Further Tightening

Societe Generale SA is “underweight” China stocks and expects a 10 percent “upside” over the next 12 months in the “best-case scenario,” Todd Martin, an Asia equity strategist at the company, said in a Bloomberg Television interview.

The bank expects two more rate increases and three more increases in the reserve requirement “until next year,” Martin said in the interview today. Higher borrowing costs may help earnings of the biggest banks by boosting net interest margins.

“The big banks benefit from their defensive features and basically the bank industry is undervalued,” Zhang Jing, analyst at China Minzu Securities, said a in phone interview.

ICBC, the nation’s biggest bank, surged 3.9 percent to 4.56 yuan. ICBC trades at 7.9 times estimated earnings, compared with a four-year average of 14.5, according to data compiled by Bloomberg.

Heilongjiang Agriculture Co. rose 2.2 percent to 14.20 yuan. A drought in China has affected 104 million mu (7 million hectares) of farm land as of yesterday, the People’s Daily reported today, citing data from the Office of State Flood Control and Drought Relief Headquarters.

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