China's Stocks Fall on Inflation Concern After Posting Best Rally in World
China’s stocks, the best performer among global markets in October, fell today on the prospect the government will intensify measures to curb inflation and property speculation. The losses narrowed the biggest monthly gain since July 2009 for the Shanghai Composite Index.
China Vanke Co., the nation’s biggest developer, and Industrial & Commercial Bank of China, the largest lender, dropped at least 1.6 percent after the banking regulator asked lenders to guard against risks from property loans and the China Securities Journal reported banks had cut discounts on mortgage rates. Bank of Communications Co. slid to a two-week low after reporting profit that trailed analyst estimates. Citic Securities Co. led brokerages lower on concern the rally this month was excessive given the outlook for earnings.
“Inflation is a persistent concern and there’s market talk that the October inflation number will be at a higher level,” said Wang Zheng, chief investment officer at Jingxi Investment Management Co. in Shanghai. “The rally for big-caps is probably coming to an end now as valuations are full after a 40 percent to 50 percent jump in less than a month.”
The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, retreated for a fourth day, losing 13.74, or 0.5 percent, to 2,978.84 at the 3 p.m. close. Today’s losses pared gains for the month to 12 percent, the most among the 88 global indexes tracked by Bloomberg. The CSI 300 Index fell 0.5 percent to 3,379.98 today.
Chinese stocks have surged on expectation central banks around the world will inject more cash into their economies to boost growth. The Shanghai gauge is still down 9.1 percent this year after the government raised bank reserve requirements and curbed lending growth to avert asset bubbles.
Property stocks fell the most in the Shanghai Composite today, with its benchmark measure losing 2 percent. Vanke dropped 1.6 percent to 9.70 yuan. Poly Real Estate Group Co., the second largest, slid 4.9 percent to 14.26 yuan. Gemdale Corp., the fourth largest, dropped 2.7 percent to 6.84 yuan.
Jingxi Investment’s Wang said consumer prices will probably rise by 3.8 percent in October. Inflation accelerated to 3.6 percent last month, the fastest pace in almost two years. The government’s full-year target for inflation is 3 percent.
China’s rate increase on Oct. 19, the first since 2007, has done little to damp the outlook for inflation and growth in the economy, judging from the widening premium investors demand to hold 10-year bonds. The difference between yields on benchmark debt due in 2012 and notes maturing in 2020 grew 7 basis points in October to 129 after reaching a five-month high of 131 this week, according to data compiled by Bloomberg.
Preventing inflation should be made the government’s top priority, Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in a commentary published in today’s China Daily newspaper.
Credit expansion has continued this year on “a large scale,” fueling excess liquidity, Yi wrote. That’s led to increases in property prices and will “inevitably” also fuel gains in consumer prices, Yi wrote.
“The tightening pressure hasn’t faded,” said Zhang Kun, a strategist at Guotai Junan Securities Co. in Shanghai, the nation’s second-biggest brokerage. “With looming inflation and high property prices, the government will follow up with measures such as raising interest rates. The rally will probably pause at this level.”
ICBC slid 2.2 percent to 4.36 yuan. BoCom, part-owned by HSBC Holdings Plc, dropped 3.3 percent to 6.17 yuan, the lowest since Oct. 12. Its net income climbed to 9.18 billion yuan ($1.38 billion) from a restated 7.39 billion yuan a year earlier. That fell short of the 9.5 billion yuan median estimate of seven analysts surveyed by Bloomberg.
Chinese banks need to “closely monitor” risks in property loans, Liu Mingkang, chairman of the China Banking Regulatory Commission said in a statement posted on the regulator’s website yesterday. Banks need to better manage liquidity risk and loans to local government financing vehicles, the statement said.
With this month’s surge for Chinese stocks, the market values on the Shanghai and Shenzhen exchanges reached $3.79 trillion yesterday, surpassing Japan to be the world’s second- biggest stock market, according to data compiled by Bloomberg.
Coal producers led the rally this month, with Yanzhou Coal Mining Co. gaining 60 percent as it reported a tripling in third-quarter profit from a year earlier. Citic, the nation’s largest brokerage by market value, has surged 46 percent this month on speculation the stock-market rally will drive trading income. It slid 4.9 percent to 15.51 yuan today, its biggest decline since June 29. Haitong Securities Co. retreated 4.5 percent to 12.44 yuan.
China has just entered the middle stage of a bull market, according to UBS AG. Small- and medium-sized stocks may outperform the market, John Tang, Hong Kong-based strategist at UBS, wrote in a report.
The brokerage raised its recommendation on the insurance industry to “overweight” from “neutral” and the non-ferrous metal industry to “neutral” from “underweight,” according to the report. It cut the rating on consumer staples to “neutral” from “overweight.”
China’s mutual funds boosted their equity allocations in the third quarter to above 80 percent, a so-called bull-market level, Shanghai-based Howbuy said.
Average stock weightings of 342 funds in China reached 81.17 percent during the three months, according to a report by Howbuy, which didn’t provide comparative figures.
Hartford Financial’s Robert Froehlich said U.S. investors should invest overseas as a hedge against higher taxes after November congressional elections and increase their allocations in Chinese and Singaporean stocks.
China is attractive because of “strong local consumer demand,” Froehlich, senior managing director at Connecticut- based Hartford Financial, which oversees $352 billion, said in e-mailed comments. “In addition business investment also remains strong. Good consumption along with good business investment will bode well for the economy and the market.”
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