China’s Shares Fall to 1-Week Low, Led by Drugmakers, Developers

Most Chinese Shares Rise on Economic Stimulus Speculation
Neodymium is displayed at the Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. factory in Baotou, Inner Mongolia, China. Photographer: Nelson Ching/Bloomberg

China’s stocks fell to the lowest level in a week on concern recent rallies for drugmakers and developers, the best performers among industry groups this past month, have been excessive as the slowing economy hurts profit.

Shandong Dong-E E-Jiao Co. and Poly Real Estate Group Co. slid at least 1.6 percent, leading health-care and real estate companies to the steepest drop among industry groups today. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., China’s biggest producer of rare earth, jumped the most in a week after the Economic Information Daily reported the government has started to draft a plan to consolidate the industry.

The Shanghai Composite Index lost 0.3 percent to 2,292.88 at the close, after changing directions at least 12 times. The CSI 300 Index slid 0.2 percent to 2,552.61. China’s markets will be closed for a holiday on June 22. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, jumped 1.8 percent to the highest level since May 16.

“There are some investors who think the bottom for the economy hasn’t been reached yet,” said Mao Sheng, an analyst for Huaxi Securities Co. in Chengdu. “With market liquidity low, it’s difficult for stocks to rise.”

Speculation that a slowdown in China’s economy is deepening and Greece will leave the euro area have dragged the Shanghai index down by 6.8 percent from this year’s high set on March 2. The gauge trades for 9.9 times estimated earnings, compared with the five-year average of 17.8, weekly data compiled by Bloomberg showed.

Drugmakers Valuations

A gauge of health-care stocks in the CSI 300 sank 2.2 percent, the most among 10 groups, after outperforming all other industries in the past month with a 6.4 percent jump. Shandong Dong-E E-Jiao dropped 4.1 percent to 39.50 yuan. The health-care index, which rallied on speculation industry earnings are more resilient in an economic slowdown, trades at 20.3 times estimated profit, compared with 10.9 for the CSI 300.

A gauge of property stocks in the Shanghai Composite slid 0.7 percent today, paring gains over the past month to 4.6 percent. Poly Real Estate, the second-biggest developer, slid 1.6 percent to 11.54 yuan. Gemdale Corp. fell 0.2 percent to 6.82 yuan. Real estate companies have rallied on the prospect of easier monetary policies.

China announced a cut in interest rates on June 7 before the release of May economic data which showed consumer prices rose the least in two years while industrial output and retail sales trailed analysts’ estimates.

HSBC Holdings Plc and Markit Economics’ flash China manufacturing PMI for June is scheduled to be announced tomorrow. The May reading was at 48.4, below the dividing line of 50 which indicated contraction.

Retailers Gain

Wuhan Department Store Group Co. rose by the daily limit of 10 percent in Shenzhen trading after the China Securities Regulatory Commission approved shareholders’ plan to buy a stake in the Chinese retailer at a 44 percent premium. Suning Appliance Co. advancing 0.3 percent to 8.74 yuan.

Shares of Chinese companies that provide basic consumer needs and those that offer discretionary products are diverging by the most in 16 months, a trend that is poised to halt as China takes steps to boost economic growth. The relationship between the MSCI China Index’s consumer staples gauge and the discretionary measure is at the lowest since February 2011, data compiled by Bloomberg show.

Consumer Stocks

Valuations of companies that make basic goods “are quite stretched and competition remains quite fierce, so there are more csi risks,” Gigi Chan, a fund manager at Threadneedle Investments, which has $123.1 billion in assets under management, said in a June 14 interview in Singapore. “We are finding more interesting ideas in the discretionary space.”

Chinese consumer stocks traded in New York rose after the nation’s commerce minister said Asia’s fastest growing economy is poised for a rebound this month.

Chen Deming told reporters June 18 in Los Cabos, Mexico, that his country’s economic situation in June is improving following government measures to shore up consumption. China’s central bank cut interest rates on June 7 for the first time since 2008 and has lowered required-reserve requirement ratio for banks three times since November to spur lending.

“I certainly wouldn’t suggest investors sell Chinese stocks, and I’m quite happy to build positions gently,” Edmund Harriss, who helps manage a $150 million equity fund at Guinness Atkinson Asset Management, said by phone yesterday from London. “If a policy official says June will look better, it will probably turn out that way. I’m reasonably optimistic.”

Operation Twist

Signs of slowing growth amid Europe’s debt crisis could mean the Federal Reserve, which began a two-day meeting yesterday, will extend its so-called Operation Twist, according to JPMorgan Chase & Co. and Jefferies & Co. The program involves selling short-term debt and buying longer-term bonds. A more aggressive response could be warranted if the Fed sees high costs in an economic slowdown.

The central bank may expand its balance sheet, extend Operation Twist and/or lengthen its short-term interest rate guidance beyond late 2014, Goldman Sachs Group Inc. Chief Economist Jan Hatzius wrote yesterday.

With Spain readying a request within days for as much as 100 billion euros ($127 billion) for its struggling banks, euro-area leaders at a Group of 20 summit in Mexico pledged to take “all necessary policy measures” to defend the currency union.

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

Fiscal Policies

China’s fiscal policy should be “really proactive” and macroeconomic policies should be readjusted in the following months to sustain faster growth, the China Daily cited a proposal from the Standing Committee of the Chinese People’s Political Consultative Conference National Committee as saying.

The government will take “concrete measures” to stimulate consumption by improving efficiency of its logistics and transportation, the same newspaper cited Huang Hai, a former assistant minister of commerce, as saying.

Inner Mongolia Baotou advanced 0.9 percent to 43.98 yuan.

China has started drafting a plan to promote consolidation of the rare-earth industry, the Economic Information Daily reported, citing an unidentified official from the State-owned Assets Supervision and Administration Commission.

The iShares FTSE China 25 Index Fund, the biggest U.S.- listed China exchange-traded fund, surged 1 percent yesterday to a five-week high of $34.90.

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