China’s Stocks Drop to Lowest Since March 2009; Smallcaps Tumble

China’s stocks fell to the lowest level since March 2009 on concern the European debt crisis will curb exports and a potential cash crunch before the Chinese new year holidays may boost lending costs for small companies.

China Cosco Holdings Co., Asia’s largest shipping line, dropped 4.4 percent after Luxembourg’s prime minister said the European Union is facing a recession of unknown scope. Ufida Software Co. plunged 8 percent, leading declines for technology stocks, the worst performing industry. Shanghai Pudong Development Bank Co. paced gains for lenders after the central bank refrained from selling three-month bills and investors speculated the central bank will cut lenders’ reserve requirements this month.

“Small-cap shares are falling as they had risen considerably before; it’s a rotational change,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “Investors are probably keen on steadier shares like big-cap companies amid the economic downturn.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 20.94 points, or 1 percent, to 2,148.45 at the close. The CSI 300 Index slumped 1 percent to 2,276.39.

The Shenzhen Composite lost 3.5 percent, while the ChiNext index of start-up companies plunged 5.7 percent. Anhui Anke Biotechonology (Group) Co. tumbled 9.5 percent to 9.99 yuan in Shenzhen. Gauges of technology and health-care companies in the CSI 300 dropped more than 3 percent, the most among industry groups. Ufida Software fell 2.5 percent to 16.48 yuan. Beijing Tongrentang Co., a retailer of Chinese medicine, declined 5.1 percent to 13.14 yuan.

The Shenzhen Stock Exchange will oversee the initial review of refinancing plans of ChiNext companies, Caixin Online reported today, cited unidentified officials as saying.

Shippers Decline

Speculation the securities regulators are “looking to decentralize oversight on financing plans may have had a psychological impact on investors,” said Wu. “If the Shenzhen exchange were to be in charge of refinancing for GEM-listed stocks, there would be less certainty.”

China Cosco lost 4.4 percent to 4.30 yuan. UniCredit SpA, Italy’s largest bank, said yesterday it will sell new shares in a 7.5 billion-euro ($9.8 billion) offer to strengthen its capital position. The rights offer boosted concern that lenders may struggle to raise more capital to weather the region’s debt crisis. The European Central Bank reported overnight deposits from financial institutions rose to an all-time high.

The Shanghai Composite fell 1.4 percent on the first trading day of the year yesterday, adding to a 22 percent plunge last year, on concern increases in borrowing costs and Europe’s debt crisis will derail economic growth. The CSI 300 slid 25 percent in 2011. The value of stocks traded in Shanghai slumped to the weakest level in three years on Dec. 29.

Money Rates

The People’s Bank of China refrained from selling three-month bills for a second week today, helping stem increases in money-market rates as banks hoard cash in the run-up to the Chinese New Year holiday.

China’s seven-day repurchase rate, which measures interbank funding availability, rose 51 basis points to 4.51 percent in Shanghai, based on a daily fixing by the National Interbank Funding Center. It reached a five-month high of 5.60 percent on Dec. 30 before sliding 1.60 percentage points yesterday after Premier Wen Jiabao said business conditions may be “relatively difficult” this quarter and monetary policy will be fine-tuned as needed.

Staples Drop

Consumer-staples producers in the CSI 300 slid for a second day, losing 1.6 percent. The stocks were the best performer last year out of the index’s 10 groups as investors bought shares of companies whose earnings can better withstand an economic slowdown. The gauge of consumer staples trades at 16.8 times estimated earnings, compared with 8.9 times for the CSI 300, according to data compiled by Bloomberg.

Kweichow Moutai Co., the biggest maker of baijiu liquor, fell 1.1 percent to 183.15 yuan, adding to yesterday’s 4.2 percent plunge.

“Chinese alcohol companies, one of the biggest winners last year, have relatively high valuations now,” said Zhang Lu, a Shanghai-based analyst at Capital Securities Corp. “Investors are taking profits.”

A gauge of financial companies in the CSI 300 rose 0.6 percent today, the only gainer among the industry groups.

Banks Gain

Pudong Development Bank gained 2.9 percent to 8.65 yuan. The lender estimated last year’s net income jumped 42 percent to 27.2 billion yuan ($4.3 billion). China Citic Bank Corp. surged 2.8 percent to 4.10 yuan. China Construction Bank Corp., the second-largest lender, increased 1.8 percent to 4.58 yuan.

Economists at Barclays Capital and Bank of America Corp. say the central bank will cut lenders’ reserve requirements before the Chinese New Year holiday starts on Jan. 23, the second reduction since 2008. The People’s Bank of China raised reserve requirements six times last year to cool inflation that accelerated to its fastest pace in three years in July.

“I think investors will gain more confidence in the interest-sensitive sector” if borrowing costs and reserve ratios are cut, while liquidity improves, Hugh Simon, chief executive officer of Hamon Investment Group, said on Bloomberg Television today from Hong Kong. He said he was buying Chinese bank shares.

Local Debt

Concerns over the quality of Chinese banks’ assets, the “major share-price driver” of lenders’ stocks last year, will ease, according to Macquarie Group Ltd.

“We believe the macro economy will undergo a soft landing and there will be further monetary loosening in 2012,” Victor Wang and Rachel Li, Hong Kong-based analysts at Macquarie, wrote in a report dated yesterday. “We thus expect asset quality concerns to ease going forward.”

China’s audit office said local governments have cleared up almost half the 531 billion yuan ($84 billion) of debt on their books that an investigation found to have irregularities. The governments and companies they set up to borrow money have resolved 259 billion yuan of bad debt with measures including land sales and the offer of new collateral, according to data released yesterday on the National Audit Office’s website.

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