China Stocks Extend Slump to 5th Week on Property Curbs
China’s stocks fell, sending the benchmark index to a fifth week of declines, after the government said it won’t relax property controls and the nation’s two largest-listed brokerages posted profit declines.
China Vanke Co. dropped to a two-week low, leading developers lower, after the government said it will seek to keep a “firm grip” on the real estate market to prevent a rebound in housing prices. Citic Securities Co. and Haitong Securities Co. retreated after estimating falling profits in the first half of this year. Hisense Electric Co., China’s biggest manufacturer of flat-panel televisions, slumped 5.1 percent after Citic Securities reduced its earnings forecast.
The Shanghai Composite Index (SHCOMP) slid 0.7 percent to 2,168.64 at the close, capping a 0.8 percent loss this week. The CSI 300 Index (SHSZ300) fell 1.1 percent to 2,398.46. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, added 2.3 percent in New York.
“The news on property curbs is adding pressure to developers and is dragging down the market,” said Tang Yonggang, an analyst at Hongyuan Securities Co. in Beijing. “Also, the market has risen for three days and there isn’t enough liquidity to sustain the gains. There’s no need to be too optimistic about A-shares.”
The Shanghai Composite has fallen 12 percent from this year’s high recorded on March 2 amid concern an economic slowdown is deepening. The measure is valued at 9.7 times estimated profit, compared with the average of 17.5 since Bloomberg began compiling the data in 2006. About 7.9 billion shares changed hands in the Shanghai Composite yesterday, 3.5 percent lower than the daily average this year. Thirty-day volatility in the gauge was at 15.49, the lowest since June 12.
Property stocks, the best performing industry group in the Shanghai index this year with an 17 percent gain, tumbled the most today, retreating 1 percent. China Vanke, the largest developer, slid 1.5 percent to 9.30 yuan, the lowest close since July 5. Poly Real Estate Group Co., the second-biggest, decreased 1.8 percent to 11.35 yuan.
Cities that have loosened controls must “set straight” government policies, the official news service reported, citing notices from the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development.
China’s two-year effort to curb the property market included raising down-payment and mortgage requirements, imposing a property tax for the first time in Shanghai and Beijing, increasing building of low-cost social housing, and placing home purchase restrictions in about 40 cities.
While Premier Wen Jiabao has said he won’t waver from curbs to keep prices affordable, local governments have started easing some property policies. The eastern city of Yangzhou in May introduced home subsidies, Beijing allowed some discounts on mortgages for first-home buyers and Shanghai raised the tax threshold on purchases of some homes.
Citic Securities, the largest-listed brokerage, fell 0.9 percent to 12.82 yuan. Its first-half net profit slid 24 percent to 2.25 billion yuan from a year ago, according to a preliminary earnings statement to the Shanghai Stock Exchange. Haitong Securities dropped 1.3 percent to 9.92 yuan. The brokerage estimated net income slumped 9.4 percent to 2.03 billion yuan in the first six months of this year.
Hisense plunged 5.3 percent to 9.03 yuan, the lowest close since Jan. 16. Citic said price competition and increased panel costs had hurt the company’s profitability. It cut Hisense’s earnings per-share estimate for this year by 7.6 percent to 1.22 yuan and for 2013 by 6.3 percent to 1.32 yuan.
Chinese stocks are cheap and the economy is poised to recover, making it a “dangerous” strategy on the part of some investors to bet on further declines in the equities market, said Herald Van Der Linde, head of Asia Pacific equity strategy at HSBC Holdings Plc.
“At this point in time, with low valuation and massive shorts in the market, it is not rational to bet that China will further fall from here,” he said in an interview from HSBC’s Singapore office yesterday. “It’s a dangerous strategy, not a rational one to do.”
The Hang Seng China Enterprises Index has plunged 19 percent from this year’s peak on Feb. 29, dragging down estimated price earnings to 7.7 times, compared with the five- year average of 14.8, according to data compiled by Bloomberg. The government may reduce reserve-ratio requirements for lenders four more times this year, Van Der Linde said.
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., advanced 2.2 percent yesterday to a two-week high of $33.71.
New Oriental Education & Technology Group Inc. (EDU)’s American Depositary Receipts bounced back to $11.20 yesterday, from $9.50 in the previous day. Shares surged as much as 37 percent yesterday after it said Muddy Waters LLC’s allegations in a July 18 report contained errors and was misleading.
The company owned 664 schools and learning centers by the end of May, and Muddy Waters’s allegation that a large part of them are franchised outlets is wrong, Beijing-based New Oriental said in yesterday’s statement. The education service company has never counted the 21 cooperation facilities it has and their student enrollments as its own, it said.
In a report July 18, Muddy Waters questioned the ownership of some of New Oriental’s schools and the consolidation of their financial statements with the parent company. A day earlier, the Chinese company said the SEC issued an order of investigation to review the consolidated earnings of its subsidiaries.
Carson Block, founder of Muddy Waters and the short seller who sparked a 74 percent drop in Sino-Forest Corp. shares before it filed for bankruptcy protection, said today his latest allegations against New Oriental Education will force the company to disclose more details about its business.
“I think there are a lot more revelations that are going to come forward,” Block said in an interview with Bloomberg TV from San Francisco.
-- Editors: Allen Wan, Richard Frost
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