China’s Stocks Fall to October Low as Free-Trade Rally Fades

China’s stocks fell to the lowest level this month as companies linked to Shanghai’s free-trade zone extended losses on concern valuations were excessive, overshadowing gains by coal producers.

Shanghai Oriental Pearl (Group) Co. and Shanghai Lujiazui Finance & Trade Zone Development Co. tumbled more than 6 percent after jumping at least 88 percent over the past two months. China Shenhua Energy Co. and China Coal Energy Co., the biggest coal producers, rose more than 1 percent on higher fuel prices.

The Shanghai Composite Index fell 0.2 percent to 2,188.54 at the close, the lowest since Sept. 30. The index climbed as much as 0.8 percent earlier after the U.S. Congress voted to end a government shutdown and raise the debt ceiling. The statistics bureau is due to release data on the nation’s economic growth and industrial output tomorrow.

“The thematic investment has come to an end for the moment and related stocks were going up too crazily,” said Wu Kan, a Shanghai-based money manager at Dragon Life Insurance Co., which oversees $3.3 billion. “Investors are cautious before tomorrow’s economic data in case some figures trail estimates.”

The Shanghai Composite has rebounded 12 percent from its four-year low on June 27, boosted by speculation the free-trade zone will attract foreign companies and allow for financial liberalization. The index trades at 8.7 times projected earnings for the next 12 months, compared with the seven-year average of 15.4, according to data compiled by Bloomberg.

Shanghai Lujiazui plunged 6.2 percent to 21.38 yuan. The shares have plunged 18 percent over the past three days. Shanghai Oriental Pearl, operator of China’s tallest television tower, slumped 10 percent to 11.06 yuan. Shanghai AJ Corp., an investment holding company, lost 6.1 percent to 11.73 yuan.

Fading Rally

Shanghai, the nation’s commercial hub, last month inaugurated an 11-square-mile trade zone as a testing ground for free-market policies. Companies with the word “Shanghai” in their name have paced the benchmark stock index’s rebound from a four-year low in June.

The rally for Shanghai companies that are linked to trade zone will continue to fade without more details on the area, Xu Shengjun, analyst at Jianghai Securities, said in an interview from Shanghai.

China is scheduled to report tomorrow the economy expanded 7.8 percent in the third quarter, according to the median forecast of 46 economists compiled by Bloomberg. The pace of growth slowed in the previous two quarters.

The statistics bureau will also probably say industrial output grew 10.2 percent in September from a year earlier, according to economists’ median estimate compiled by Bloomberg. That would compare with 10.4 percent growth in August.

Coal Producers

A government report today showed foreign-direct investment rose 4.9 percent last month from year-earlier levels, compared with a 0.6 percent increase in August.

A measure of energy stocks in the CSI 300 advanced 0.9 percent today, the only gainer among the 10 sub-indexes. Shenhua rose 1.7 percent to 16.74 yuan after saying coal sales increased 40 percent in September. China Coal climbed 2.1 percent to 5.44 yuan. Datong Coal Industry Co. jumped 2.3 percent to 6.60 yuan.

The Bohai-Rim steam coal price index, which tracks power-station coal prices at six Chinese ports, rose 0.2 percent in the week from Oct. 9 to yesterday, according to Qinhuangdao Seaborne Coal Market’s website. The measure earlier fell for a 16th week since Jun. 19.

China’s bond and stock investors are diverging in their outlook for the economy as yields point to subdued growth while equities are set for the longest winning streak in three years.

Yield Curve

The government’s 10-year notes yielded 39 basis points more than two-year debt on Oct. 15, Chinabond data show. That compares with averages of 94 basis points for the past five years and 40 basis points in the month after Lehman Brothers Holdings Inc. collapsed in September 2008. The Shanghai Composite climbed 10 percent last quarter, its best performance since 2010.

“The yield curve suggests the economy is in the worst shape since the global financial crisis,” Heather Hsu, Shanghai-based equity strategist at Fortune CLSA Securities Ltd., said in an Oct. 14 interview. “The equity market will likely go down to reflect what’s going on in the economy.”

China’s stocks will extend gains before a Communist Party meeting in November on expectations of more policy reforms, according to Zhang Yanbing, analyst at Zheshang Securities. Premier Li Keqiang and President Xi Jinping are expected to seek support for national plans to reduce the government’s hand in the economy and financial system at the meeting.

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