China’s Stocks Drop for Second Day as PMI Signals Contraction

China’s stocks fell for a second day as a private survey showing the nation’s manufacturing may shrink for a seventh month overshadowed a government pledge to boost infrastructure spending.

PetroChina Co. and Aluminum Corp. of China Ltd. paced losses by commodity producers after the preliminary reading by HSBC Holdings Plc and Markit Economics dropped to 48.7 from the previous month. Shanghai Pharmaceuticals Holding Co. slid to a four-month low after the 21st Century Business Herald said the company was given notice of a regulatory probe, contradicting a company denial. China Railway Erju Co. jumped 4.1 percent after the government said it will speed up building railways.

“The slowing economy and Europe’s debt crisis are still the issues that needs to be overcome,” Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co., said by phone today.

The Shanghai Composite Index fell 12.46 points, or 0.5 percent, to 2,350.97 at the close, reversing an earlier 0.4 percent gain. The CSI 300 Index sank 0.8 percent to 2,595.26. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, added 0.1 percent in New York yesterday.

Thirty-day volatility in the Shanghai composite was at 15.11 today, near the lowest in a week. About 8.5 billion shares changed hands in the gauge yesterday, 5.5 percent lower than the daily average this year.

Flash PMI

The Shanghai index has fallen 4.5 percent from this year’s high on March 2 on concern the slowdown in the world’s second-largest economy is deepening. Stocks in the gauge are valued at 10.1 times estimated earnings, compared with a record low of 8.9 times on Jan. 6, according to weekly data compiled by Bloomberg.

The 48.7 reading for the purchasing managers’ index released by HSBC and Markit Economics today compares with a final 49.3 for April. If confirmed on June 1, it would mark the longest run of below-50 readings since the financial crisis.

PetroChina, the nation’s biggest oil company, fell 0.5 percent to 9.51 yuan. Chalco, the listed unit of nation’s biggest maker of the lightweight metal, slipped 0.4 percent to 6.78 yuan. Huludao Zinc Industry Co., China’s second-largest zinc producer, lost 2.2 percent to 3.58 yuan.

Concerns over Europe also weighed on commodity producers and shipping lines. European leaders clashed over joint debt sales as they called on Greece to stick with the budget cuts needed to stay in the euro. Germany has “huge difficulties” with France’s call for joint borrowing by euro governments, Chancellor Angela Merkel told reporters in Brussels early today after six hours of talks.

Trade Concern

China Shipping Container Lines Co., the country’s second-largest carrier of sea-cargo boxes, fell 1.7 percent to 2.92 yuan. China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, slipped 1 percent to 4.92 yuan.

Europe is China’s biggest export market, accounting for about 18 percent of the nation’s overseas shipments, according to Shenyin & Wanguo Securities Co.

Shanghai Pharma, China’s second-largest drug distributor, lost 0.7 percent to 10.67 yuan after plunging by the 10 percent daily limit yesterday.

A written notice will be given once the investigation, by the Hong Kong Stock Exchange and the China Securities Regulatory Commission, is almost complete, the 21st Century Business Herald reported today, citing an unidentified high-level executive at Shanghai Pharma. The drug seller said late yesterday it hadn’t received any notice from either regulatory body, in response to a report by the same newspaper that it was being probed.

Industrial Companies

Lu Di, an official with Shanghai Pharma’s board office, declined to comment on today’s report when reached by telephone. The company has nothing to add to the statement issued last night, Lu said.

A measure of industrial stocks in the CSI 300 added 0.2 percent today, the second-biggest gain among the 10 industry groups. China Railway Erju surged 4.1 percent to 6.67 yuan. China Railway Construction Corp., builder of more than half the nation’s rail links since 1949, advanced 1.1 percent to 4.53 yuan.

The nation “must intensify precautionary adjustment and fine-tuning of policies according to changes in conditions,” the government said on its website yesterday, summarizing a meeting of the State Council, or Cabinet.

China will start a series of “key infrastructure projects that are vital to the overall economy and can facilitate growth” and speed up construction of existing railway, environmental protection and rural projects, it said.

The statement builds on Premier Wen Jiabao’s comments published May 20 showing a bigger focus on bolstering growth, which spurred speculation the government will step up efforts to combat a slowdown after April trade and industrial output were below forecasts. Authorities this month cut banks’ required reserves for the third time since November.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE