China’s Stocks Fall on Unexpected Drop by Manufacturing

China’s stocks fell, dragging the benchmark index lower for the first time in three days, as an unexpected drop in a preliminary manufacturing index boosted concern the economic slowdown is deepening.

Jiangxi Copper Co. and China Petroleum and Chemical Corp. led declines for metal and energy companies. China Merchants Bank Co. slid 1.5 percent after its rights offering was approved. Film company Huayi Brothers Media Corp. jumped 10 percent after it announced plans to acquire a mobile gaming company and Citic Securities Co. boosted its profit estimates.

The Shanghai Composite Index fell 0.5 percent to 2,033.33 at the close. The preliminary reading of 47.7 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compares with the 48.2 median estimate in a Bloomberg News survey of 19 economists. The report adds to concerns about the outlook for the economy after money-market rates jumped to record highs last month.

“The bad PMI data is proving that the economy is declining further and there are worries that company profits may retreat too,” Zhang Haidong, an analyst at Tebon Securities Co., said by phone from Shanghai. “It seems the government is persistent in not changing its monetary policy and this will drag the market lower amid tight liquidity and economic weakness.”

The CSI 300 Index retreated 0.7 percent to 2,249.15. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong lost 0.3 percent. The ChiNext index of small companies jumped for a third day, gaining 2.1 percent. The Bloomberg China-US Equity Index added 1.7 percent yesterday.

Trading volumes on the Shanghai Composite climbed 12 percent from the 30-day average, according to data compiled by Bloomberg. The index has fallen 10 percent this year, compared with an 8 percent drop for the MSCI Emerging-Markets Index.

Flash PMI

China’s manufacturing weakened further in July, signaling the worst of the nation’s slowdown has yet to be reached, according to the HSBC report. The reading was less than June’s 48.2 and if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction.

“The key thing now is confidence,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said on Bloomberg Television. “The confidence now is pretty weak both in the financial market and the corporate sector.”

A gauge of material companies in the CSI 300 dropped 1.1 percent. Jiangxi Copper slid 1.4 percent to 15.76. Tongling Nonferrous Metals Group Co. plunged 2.4 percent to 10.91 yuan. Copper for delivery in three months fell as much as 0.8 percent to $6,986 a metric ton on the London Metal Exchange.

Banks Drop

The financial sub-index including banks and developers fell the most among the industry groups, retreating 1.7 percent. China Merchants Bank lost 1.5 percent to 10.90 yuan. The bank received approval from China Securities Regulatory Commission to sell 3.07 billion A shares in its rights offer.

Ping An Bank Co. slumped 2 percent to 9.76 yuan after gaining 5.7 percent yesterday. China Vanke Co., the biggest developer, slid 2.9 percent after jumping 4.6 percent yesterday.

Chinese lenders may follow China Merchants Bank in rights offerings, leading to excessive share supply and dragging down the overall stock market, analyst Ni Jun of Shenyin & Wanguo Securities Co. wrote in a report today. The government has halted approvals for IPOs since October to support equities.

The Ministry of Finance sold at least 30 billion yuan ($4.9 billion) of five-year bonds at an average yield of 3.7 percent, the highest since August 2011, amid speculation demand waned as the supply of cash tightened.

China Petroleum, known as Sinopec, paced declines for energy producers, retreating 1.1 percent to 4.43 yuan. China Shenhua Energy Co., the biggest coal producer, slid 1.9 percent to 15.91 yuan.

Smallcaps Jump

Huayi Brothers rose 2.86 yuan to 21.41 yuan, the biggest gain since October 2009. Citic Securities boosted Huayi’s 2013 earnings per-share estimate by 19 percent after it announced plans to buy Yinhan Technology. Aisino Co. led a rally for technology shares, gaining 9.9 percent to 16.85 yuan.

Chinese technology and consumer stocks will be the top performers in next 12 months, while financial and material companies remain the least favored, Morgan Stanley analysts led by Martin Yule wrote in a report yesterday, citing a survey of investors.

China banned government and Communist Party agencies from constructing new buildings for five years and told them to suspend projects that have already won approval as the country seeks to cut wasteful spending.

The ban includes construction for purposes of training, meetings and accommodation, the government said in a statement on its website yesterday, calling for resources to be spent instead on developing the economy and improving public welfare.

Zhejiang Yasha Decoration Co., which provides decorating services for large infrastructure projects, slumped 5.4 percent to 26.21 yuan in Shenzhen, adding to an 15 percent loss this month.

-- Editors: Allen Wan, Richard Frost

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