China’s Stocks Fall to One-Week Low as Valuation Concerns Mount

Chinese stocks fell to a one-week low, led by consumer-staple and financial shares, amid mounting concerns over equity valuations approaching the highest levels in eight months.

Poly Real Estate Group Co. declined among financial stocks, the biggest drag on the CSI 300 Index after valuations climbed to a 10-month high. Liquor maker Kweichow Moutai Co. sank 2.9 percent after forecasting profit that missed some analyst estimates. Goertek Inc., an Apple Inc. supplier, dropped to a five-week low after the U.S. company’s shares slumped on earnings. Yunnan Baiyao Group Co., which makes traditional Chinese medicine, led health-care stocks higher.

The Shanghai Composite Index sank 0.5 percent to 2,291.30, its lowest close since Jan. 17. The measure lost 1.1 percent this week. The gauge has risen 17 percent since approaching a four-year low on Dec. 3 amid signs of an economic recovery and as the government pledged to encourage urban development. It’s valued at 12.6 times reported profit, 1.8 percent below the highest level since May 8, data compiled by Bloomberg show.

“Medium-term prospects are still a blur,” Xu Shengjun, an analyst at Jianghai Securities Co. in Shanghai, said by phone today. “Any reform initiatives are not realized yet. Until we see concrete steps for reforms, it’s hard for the index to break 2,350.”

The CSI 300 lost 0.4 percent to 2,571.67, paring its climb since Dec. 3 to 22 percent. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong retreated 0.8 percent. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, fell 0.7 percent in New York yesterday.

Financial Stocks

Shanghai Composite trading volumes were 25 percent lower than the 30-day average today. Its 30-day volatility was at 20.6, compared with the 11-month high of 21.6 on Jan. 17. The index fell 0.8 percent yesterday, the most since Jan. 17, as North Korea threatened a nuclear test targeted at the U.S. The White House said the threat was “needlessly provocative” and will lead to further isolation and sanctions.

A measure of the CSI 300’s banking, brokerage and property stocks slid 1.2 percent, the second-largest decline among 10 industry groups. The gauge was valued at 9.4 times reported profit yesterday, the highest level since March, data compiled by Bloomberg show.

Citic Securities Co., the nation’s biggest listed brokerage, retreated 2.3 percent to 13.54 yuan. Poly Real Estate, China’s second-largest developer by market value, slid 3.6 percent to 13 yuan. China Vanke Co., the biggest, lost 2.1 percent to 11.70 yuan.

Moutai Earnings

China’s new leaders may introduce fresh curbs on the property market when they take power in March, David Cui, an equity strategist at Bank of America Corp., said at a media briefing in Hong Kong today. Chinese stocks may “hold up fairly well” in the next few months, with the Shanghai Composite trading in a range of 1,800 and 2,200, he said.

Kweichow Moutai, China’s biggest producer of baijiu liquor by market value, slid 3.5 percent to 189.05 even after it said yesterday profit may have risen about 50 percent in 2012 from a year earlier. Shenyin & Wanguo Securities Co. had forecast a 52 percent increase in earnings-per-share, while the market consensus was for growth of 63 percent, Tong Xun, an analyst at the brokerage, wrote in a report today.

Wuliangye Yibin Co., the nation’s second-largest baijiu producer, fell 3 percent to 25.12 yuan. Sichuan Swellfun Co., the Chinese liquor maker that’s a partner of Diageo Plc, lost 3 percent to 17.23 yuan.

GoerTek dropped 2.4 percent to 34.02 yuan, capping a 14 percent loss for the week. Apple slid 12 percent yesterday in New York after reporting the slowest profit growth since 2003 and the weakest sales increase in 14 quarters.

Defensive Stocks

A health-care sub-index jumped 2.7 percent today, the biggest gain among the CSI 300’s industry groups, to the highest level since Sept. 8, 2011. Yunnan Baiyao gained 2.5 percent to 76.65 yuan. Huadong Medicine Co. added 2.7 percent to 38.32 yuan.

“Investors are buying health-care stocks to seek a safe haven,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “Pharmaceutical shares are typically defensive stocks and deliver stable earnings growth.”

Lion Fund Management Co., the $7.5 billion money manager that led Chinese investors into gold exchange-traded products, said the best returns in 2013 will come from stocks that tap the migration of farmers to the city.

Demand for building materials, home appliances and property will benefit as Li Keqiang, poised to become China’s new premier in March, promotes urbanization to drive economic growth that’s showing signs of accelerating after a two-year slowdown, Lion’s Chief Executive Officer, Ao Chengwen, said in an interview with Bloomberg News on Jan. 23.

Index Futures

China selected five foreign institutional investors to trade stock-index futures in the country, according to an official from the China Financial Futures Exchange.

The exchange approved the five qualified foreign institutional investors “recently,” said the official, who didn’t identify them and asked not to be named because the information isn’t public. The QFIIs may trade the futures only for hedging purposes, China Business News reported today.

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., was unchanged at $41.53 in New York, after declining 0.5 percent Jan. 23. Shanghai-based Focus Media Holding Ltd., which disclosed an investigation into possible violations of securities laws Jan. 18, sank the most since September.

Before it's here, it's on the Bloomberg Terminal.