China Stocks Drop to Lowest Level This Month on Property, Policy

China’s Stocks Drop on Monetary Policy Concern
Apartment buildings stand in Beijing. The central government asked local administrations to reverse any relaxation of housing curbs, CCTV said, citing inspection teams from the country’s State Council. Photographer: Nelson Ching/Bloomberg

China’s stocks fell to the lowest level this month on concern the government will hold off from easing monetary policy after real-estate prices rose in the largest number of cities in 14 months.

China Vanke Co. and Poly Real Estate Group Co. led declines for the nation’s property developers. The Financial News, run by the People’s Bank of China, said in a commentary the central bank has no plan to cut lenders’ reserve-requirement ratios in the short term. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. fell to the lowest in two weeks after profit declined and the China Securities Journal reported the government is studying a resource tax on rare earths.

“A rebound in property prices is bad for the economy as the government will refrain from conducting further policy easing,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “Investor sentiment is bad and the market will test new lows.”

The Shanghai Composite Index fell 0.4 percent to 2,106.96 at the close, the lowest level since July 31. The CSI 300 Index declined 0.5 percent to 2,301.79. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong lost 0.4 percent. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, fell 0.6 percent on Aug. 17.

The Shanghai Composite lost 2.5 percent last week, adding to a 14 percent slump from this year’s high on March 2, amid speculation the economic slowdown is worsening and the central bank is reluctant to cut interest rates or reserve-requirement ratios on inflation concerns. The gauge is valued at 9.5 times estimated profit, compared with the 17.4 average since Bloomberg began compiling the data in 2006.

Policy Outlook

The Chinese stock market’s losses reflect disappointment there haven’t been reserve-ratio cuts, Timothy Riddell, head of global markets research at Australia & New Zealand Banking Group Ltd., said on Bloomberg Television today from Hong Kong.

Policy makers cut interest rates in June and July after two reductions in banks’ reserve-requirement ratios this year as the economy expanded at the slowest pace since 2009.

The resumption of 14-day reverse repurchase operations last week suggests there won’t be a reserve-ratio cut, the Financial News said on Aug. 18. A reduction may increase the risk of investment overheating and raise inflation expectations, the paper said.

Property Curbs

A measure of property stocks in the Shanghai Composite slid 1.3 percent, the most among five industry groups. Vanke, the nation’s biggest listed property developer, lost 1.3 percent to 8.50 yuan. Poly Real Estate, the second largest, retreated 3 percent to 10.02 yuan. China Merchants Property Development Co., the third biggest, fell 1.6 percent to 20.20 yuan.

China’s prices of new homes rose in the largest number of cities in 14 months in July. Prices climbed from a month earlier in 49 of the 70 cities tracked by the government, the National Bureau of Statistics said over the weekend. That was the most since May last year and compared with 25 cities in June.

“Rising property prices are constraining aggressive policy action from the central bank,” said Zhang Zhiwei, China economist at Nomura Holdings Inc. “The government will introduce more policies to contain a property bubble,” including the extension of a property tax to more cities, he said.

China may expand a property tax trial and raise the “threshold” for home pre-sales if housing prices rebound too fast, the Shanghai Securities News reported today, citing unidentified people.

Earnings Decline

China’s big four banks made about 70 billion yuan ($11 billion) of new loans in the first half of August, about 20 billion yuan more than the first half of July, the Shanghai Securities News reported today. August total new bank lending may be about 600 billion yuan, it said.

Baotou Rare-Earth, China’s biggest producer of rare earth, slid 1.7 percent to 37 yuan after it said first-half profit dropped 21 percent from a year earlier. Xiamen Tungsten Co., which has rare-earth operations, fell 0.7 percent to 42.93 yuan.

The government is studying a price-based resource tax on rare earths and may raise the levy on the mineral, the China Securities Journal reported over the weekend, citing an unidentified person. Resource taxes account for about 20 percent of rare earth exploration costs, it said.

China Pacific Insurance (Group) Co., the fourth-largest insurer, dropped 3.5 percent to 19.33 yuan after it reported first-half net income fell 55 percent from a year earlier.

Fear Index

Yuan Longping High-tech Agriculture Co. led agricultural stocks higher after the company said first-half profit rose 49 percent from a year earlier. The stock gained 4.1 percent to 21.66 yuan, its biggest advance since July 23.

Gansu Dunhuang Seed Co. surged by the 10 percent daily limit to 8.25 yuan. Shandong Denghai Seeds Co. advanced 5.4 percent to 21.28 yuan.

Thirty-day volatility on the Shanghai Composite was at 12 today, compared with this year’s average of 17.4. About 4.6 billion shares changed hands in the gauge today, 42 percent lower than this year’s average.

Options traders are charging the biggest premium since March to protect against losses in Chinese companies on signs that a slowdown in the world’s second-largest economy is worse than economists estimated.

The AlphaShares Chinese Volatility Index, derived from options on companies listed in Hong Kong, traded at a premium of as much as 41 percent over the Chicago Board Options Exchange Volatility Index last week, the biggest gap since March 29. The spread compares with a 10 percent discount a year ago.