China’s Stocks Drop Most in Month on Economy, Deflation Concern

China’s stocks fell by the most in a month, after a drop in producer prices fueled concern deflation may spread to other parts of the economy and Premier Wen Jiabao said the economy faces “relatively large” downward pressure.

PetroChina Co., the biggest energy producer, dropped 2.7 percent to a record low before a report later this week that may show economic growth slowed to 7.7 percent in the second quarter. Angang Steel Co. paced declines for steelmakers after saying it expects to swing to a loss in the first half. Data today showed consumer prices rose 2.2 percent in June from a year earlier, compared with the 2.3 percent median estimate in a Bloomberg survey, while producer prices slid 2.1 percent.

“A lower inflation figure actually implies the economy is slowing down more than expected,” said Cao Xuefeng, an analyst at Huaxi Securities. “Investors are quite worried that other data this month will be below expectations.”

The Shanghai Composite Index dropped 52.77 points, or 2.4 percent, to 2,170.81 at the close, the biggest decline since June 4. The CSI 300 Index slid 2.3 percent to 2,416.04. The Bloomberg China-US Equity Index of the most-traded Chinese companies in New York lost 0.1 percent last week, after sinking 1.5 percent on July 6.

China’s benchmark stock index fell last week on concern the government isn’t doing enough to stem an economic slowdown that will hurt company earnings. The Shanghai gauge, which has lost 1 percent this year, trades at 9.6 times estimated profit, compared with the average of 17.6 since Bloomberg began compiling the data in 2006.

Commodity Stocks

Wen said the government will intensify fine-tuning of policies even as measures taken since April are helping stabilize a slowdown. The People’s Bank of China lowered the benchmark one-year lending rate by 0.31 percentage point on July 5, the second rate cut in a month.

Wen’s comments were made during a tour of Jiangsu province, the official Xinhua News Agency reported yesterday. The premier also pledged to “unswervingly” continue property controls and prevent prices from rebounding, Xinhua said.

Gauges of energy and material stocks in the CSI 300 fell 4.1 percent and 2.8 percent respectively. Jiangxi Copper, the largest producer of the metal, slid 2 percent to 23.71 yuan. Aluminum Corp. of China Ltd. slumped 3.9 percent to 5.89 yuan. Yanzhou Coal Mining Co. declined 3.9 percent to 18.50 yuan. PetroChina lost 2.7 percent to 8.86 yuan, the lowest close since its listing in November 2007.

Deflation Risks

China’s benchmark price for power-station coal fell for a ninth week, the longest period of losses since at least 2008, as slowing economic growth and increased use of hydropower crimped electricity demand.

Angang Steel declined 2.9 percent to 3.74 yuan. The company said it expects to swing to a loss in the first half after prices plunged. Weakening exports and China’s curbs on property have eroded steel demand and prices. Baoshan Iron & Steel Co., the listed unit of China’s second-biggest steelmaker, slumped 2.6 percent to 4.17 yuan.

China’s consumer-price inflation eased to a 29-month low in June, giving Wen more room to relax economic policies. The consumer price index rose 2.2 percent from a year earlier, the National Bureau of Statistics said today in Beijing. Producer prices dropped 2.1 percent, versus the median forecast for a 2 percent fall.

Deflation may become a bigger concern than inflation, Xianfang Ren, China economist at IHS Global Insight, wrote in a report. The deflationary spiral looks to have started in some industrial sectors and the last time China saw such a long slide in producer prices was during the global financial crisis, Ren said.

Growth Concerns

Exports from the world’s second-largest economy probably climbed 10.6 percent in June, after a 15.3 percent increase in May, according to the median estimate of economists in a Bloomberg survey ahead of official data tomorrow.

A government report on July 13 is expected to show the economy expanded at the slowest pace in three years, according to the median estimate of 15 economists surveyed by Bloomberg. The economy expanded 8.1 percent in the first three months, the fifth quarterly slowdown.

Chinese economists’ forecasts for second-quarter growth are “too optimistic,” according to Lu Ting, China economist at Bank of America Corp.’s Merrill Lynch unit.

Bank of America estimates growth of 7.5 percent in the second quarter though it may be as low as 7.3 percent to 7.4 percent, Lu said in a Bloomberg Television interview today from Hong Kong. He predicts two more rate cuts by the end of this year and three more reductions in lenders’ reserve-requirement ratios. The central bank has cut reserve ratios three times since November in an effort to spur lending to small companies.

Appliance Stocks

GD Midea Holding Co., China’s second-biggest publicly traded appliance maker, plunged 9.8 percent to 9.90 yuan. Qingdao Haier Co. fell 4 percent to 11.40 yuan.

Some Chinese home appliance manufacturers have been improperly receiving energy-saving appliance subsidies for products that aren’t qualified, the state-run China National Radio reported, citing its own investigation.

Guoguang Electric Co., which makes home-theater speakers, slumped 6.8 percent to 4.14 yuan. First-half profit may have dropped as much as 90 percent, compared with an earlier projection of as much as 50 percent, the company said.

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