Most China Stocks Fall, Led by Small Companies; Developers Gain

Most Chinese stocks fell after manufacturing indexes signaled small businesses are struggling. Losses for technology companies and retailers overshadowed gains for property developers.

Beijing Originwater Technology Co., which has the biggest weighting on the ChiNext index of small companies, plunged 5.3 percent. Chongqing Department Store Co. declined 3.1 percent, dragging down a gauge of commercial enterprises including retailers that trade in Shanghai. Gemdale Corp. rose for the first time in three days, leading property stocks higher after new home prices jumped last month.

The Shanghai Composite Index slipped 0.1 percent to 2,299.25 at the close, as five shares dropped for every four that advanced. The ChiNext index slid 2 percent. The official Purchasing Managers’ Index for smaller companies fell to 47.3 in May, even as the broader gauge rose to 50.8. Another PMI index from HSBC Holdings Plc and Markit Economics that includes small enterprises fell more than forecast to 49.2, an eight-month low.

“The government’s PMI is geared towards bigger companies and the HSBC one comprises smaller businesses,” said Mao Sheng, an analyst for Huaxi Securities Co. in Chengdu. “The fact that the HSBC PMI is lower also points to the possible weakness of small-company stocks.”

The Shanghai Composite gained 5.6 percent last month, the most since December, after interest-rate cuts by central banks around the world spurred capital inflows and policymakers accelerated reforms of the economy by allowing private investment in industries such as telecommunications.

Inflection Point

The CSI 300 Index retreated 0.2 percent to 2,602.62 today, while the CSI Smallcap 500 Index dropped 0.7 percent and the Hang Seng China Enterprises lost 0.5 percent. The Bloomberg China-US Equity Index sank 2.6 percent on May 31.

China’s one-year interest-rate swaps climbed to the highest level in more than four months after a report showing a jump in new home prices fueled speculation the central bank will reduce cash in the financial system.

“We are at or near an inflection point of liquidity growth that has been supporting the modest run-up in May,” Hao Hong, the chief China strategist at Bank of Communications Co., said in an e-mailed note today. “Sectors sensitive to liquidity conditions, such as the ChiNext, will be vulnerable.”

Beijing Originwater plunged 5.3 percent to 37 yuan, the biggest decline since January. The ChiNext has gained 47 percent this year, compared with a 1.3 percent advance for the Shanghai index and a 3.2 percent gain for the CSI 300.

A gauge of commercial companies in the Shanghai measure slipped 0.5 percent, the most among five industry groups. Chongqing Department Store fell 3.1 percent to 22.46 yuan. Shanghai Friendship Group Inc. slid 1.6 percent to 8.65 yuan.

PMI Data

The Purchasing Managers’ Index climbed from 50.6 in April, the National Bureau of Statistics and China Federation of Logistics and Purchasing said on June 1. HSBC gave the final May reading of its manufacturing index, showing a decline from 50.4 in April. The gauge had a preliminary figure of 49.6 released May 23. A government gauge of service industries today showed the slowest expansion since September. Levels below 50 signal contraction.

A gauge of property stocks in the Shanghai Composite rose 0.3 percent, the most among the groups. Gemdale increased 1.6 percent to 7.87 yuan. Poly Real Estate Group Co., the second-largest developer, gained 0.9 percent to 12.35 yuan.

The nation’s new home prices jumped in May as government efforts to tighten property curbs this year failed to deter buyers. Prices surged 6.9 percent from a year earlier to 10,180 yuan ($1,660) per square meter (10.76 square feet), Soufun Holdings Ltd., the country’s biggest real estate website owner, said in a statement today after a survey of 100 cities.

Property Concerns

“Rising property prices are definitely a concern,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “People in the market think the central bank may have to drain liquidity to control prices.”

Trading volumes in Shanghai index were 3.2 percent below the 30-day average today, while 30-day volatility was at 16.2, compared with this year’s average of 19.3, data compiled by Bloomberg show. The benchmark index trades at 9.4 times 12-month estimated earnings, compared with a seven-year average of 15.5 times, according to data compiled by Bloomberg.

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., slid 2 percent on May 31, taking its May slump to 4.6 percent. PetroChina Co. lost 9.5 percent in its fifth monthly decline, while China Eastern Airlines Corp. tumbled 18 percent for the steepest slump since 2011. Huaneng Power International Inc., China’s largest electricity producer, lost the most in 14 months in May.

-- With assistance from Belinda Cao in New York. Editors: Allen Wan, Ravil Shirodkar