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China’s Stocks Drop as Brokerages Cut Economic Growth Estimates

China’s Stocks Drop
Investors monitor and trade stocks at a securities exchange in Shanghai, China. Photographer: Qilai Shen/Bloomberg

China’s stocks fell the most in more than a week after Morgan Stanley and Deutsche Bank AG cut their economic growth forecasts for the Asian country on concern a slowdown in the U.S. and Europe will reduce exports.

Anhui Conch Cement Co., China’s biggest cement maker, declined the most in nine months on concern prices for the building material are weakening in the eastern part of the nation. Poly Real Estate Group Co. and China Merchants Bank Co. dragged down a gauge of banks and developers to its biggest loss in almost two weeks. Laiwu Steel Corp. retreated 2.7 percent after first-half profit fell.

“The economic slowdown in China over the next couple of years is something foreseeable as China relies too much on exports and investment and these two drivers cannot sustain growth for long,” said Zhang Qi, an analyst at Haitong Securities Co. in Shanghai. “I still don’t see a big investment opportunity in the stock market.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 41.79 points, or 1.6 percent, to 2,559.47 at the 3 p.m. close, its biggest decline since Aug. 8. The CSI 300 Index lost 1.8 percent to 2,834.25.

The Shanghai Composite has slid 8.9 percent this year as the central bank raised interest rates five times and ordered lenders to set aside more cash as deposit reserves 12 times since the start of 2010 to contain inflation that quickened to the fastest pace in three years last month. The gauge is valued at 11.7 times estimated earnings, the lowest since Bloomberg began to track the data in 2006, according to weekly data compiled by Bloomberg.

Growth Concerns

Anhui Conch slumped 6.2 percent to 23.94 yuan, the biggest drop since Nov. 17. Gansu Qilianshan Cement Group Co. lost 4.2 percent to 15 yuan. Huaxin Cement Co., the Chinese affiliate of Holcim Ltd., retreated 6.8 percent to 26.27 yuan.

“With cement prices in eastern China falling today, investors may be worrying about whether the company can sustain prices,” Zhu Jixiang, analyst at Capital Securities Corp. in Shanghai. “Companies in eastern China could always keep prices stable even during the slack season, so the price drop may be affecting investors psychologically.”

Morgan Stanley cut its estimate for China’s 2012 economic growth to 8.7 percent from 9 percent, citing the effects of weaker growth in the U.S. and Europe. Gross domestic product growth will slow to 8.1 percent in the fourth quarter of this year from 9.7 percent in the first quarter, the brokerage said.

China’s economy may grow less than previously forecast in 2011 and 2012 amid the “shock” of a U.S. and European Union slowdown, according to Deutsche Bank. The brokerage cut its 2011 GDP growth forecast to 8.9 percent from 9.1 percent and lowered its 2012 GDP growth estimate to 8.3 percent from 8.6 percent, analysts led by Ma Jun wrote in report.

Financial Stocks

German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected selling euro bonds and expanding a 440 billion-euro ($633 billion) rescue fund after talks between the two on Aug. 16 in Paris. Standard & Poor’s lowered the U.S. rating one level to AA+ from AAA for the first time on Aug. 5.

A gauge of financial companies in the CSI 300 slid 1.7 percent. Merchants Bank fell 2.4 percent to 11.63 yuan. China Minsheng Banking Corp., the nation’s first privately owned bank, lost 1.8 percent to 5.60 yuan. Huaxia Bank Co., owned by Deutsche Bank AG, dropped 1.6 percent to 10.39 yuan.

Bad loans at banks will rise to “shockingly high” levels, eroding profits and slowing growth in the world’s second-biggest economy, said Vontobel Asset Management Inc.’s Rajiv Jain, who runs some of this year’s best-performing mutual funds.

‘Frothy’ Market

China’s local governments are struggling to repay their debt and “frothy” real-estate markets may leave banks exposed to falling prices, Jain said in an Aug. 16 phone interview. While valuations on Chinese banks have dropped to the lowest levels since October 2008, Jain said the shares aren’t cheap enough to buy because the lenders’ leverage is too high and earnings are likely to disappoint investors.

Poly Real Estate, China’s second-largest developer by market value, dropped 4.4 percent to 10.56 yuan. China Vanke Co., the biggest, fell 1 percent to 8.14 yuan.

Home prices in Beijing and Shanghai stopped rising for the first time this year, signaling measures to cool the property market are beginning to work.

“This is the beginning of a downward trend in property prices in China,” said Sun Mingchun, a Hong Kong-based economist for Daiwa Securities Capital Markets. “With more second and third-tier cities introducing purchase restriction policy, sequential price declines will occur in more and more cities in the coming months.”

Laiwu Steel slid 2.7 percent to 8 yuan after saying net income dropped 27 percent from a year earlier in the first six months. Baoshan Iron & Steel Co., the listed unit of China’s second-biggest steelmaker, lost 1.9 percent to 5.23 yuan.

Rate Outlook

The nation’s benchmark money-market rate rose the most in four weeks on speculation the central bank will add to this year’s three interest-rate increases as part of efforts to stem gains in living costs.

The seven-day repurchase rate, a gauge of funding availability in the financial system, rose 60 basis points, or 0.6 percentage point, to 3.89 percent as of 3:21 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That’s the biggest increase since July 20.

China should place priority on using interest rates as one of its policy tools, the Financial News said today, citing unidentified market participants. The Asian nation will likely further tighten lending for property development in the second half and ease loans to industries targeted for support, it said.

Earnings Yields

China’s stocks may extend a rebound from a bear market if history is any guide, as rising corporate earnings coupled with slumping equities make them the cheapest relative to government bonds in more than two years.

The earnings yield, or net income divided by stock prices, of the Shanghai Composite and the yield of China’s 10-year government bond. The premium widened to 3.23 on Aug. 9, the most since the start of 2009. When the gap approached that high in July 2010, the Shanghai Composite Index jumped 34 percent in four months. The earnings yield is used by money managers to compare returns among asset classes in making investments.

“Stock prices already reflect a worst-case scenario of a recession,” even though first-half profits look quite strong and earnings may grow faster-than-expected in the second half, said Li Jun, a strategist at Central China Securities Co. in Shanghai. “In the long run, stocks are very attractive compared with bonds.”

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