China’s Stocks Slump as Small Companies Tumble on Money Rates

China’s stocks fell, with the benchmark index for smaller companies capping the biggest two-day loss in 18 months, after money-market rates surged.

Leshi Internet Information & Technology (Beijing) Co., the operator of online-video portal, plunged by the 10 percent daily limit for a second day. Inner Mongolia Yili Industrial Group Co., China’s biggest dairy producer by sales, declined by the most in five months. Huaneng Power International Inc., the listed unit of China’s largest power group, slumped 5.8 percent after third-quarter earnings missed estimates.

The Shanghai Composite Index slid 1.3 percent to 2,183.11 at the close, while the ChiNext index of smaller companies plunged 2.9 percent. China’s benchmark money-market rate jumped the most since July as the People’s Bank of China refrained from adding funds to markets. The nation’s consumer prices rose the most since February last month and Song Guoqing, an academic adviser to the PBOC, said on Oct. 20 the authority may tighten policy this year if inflation quickens.

“Monetary policies will be slightly tight for the rest of the year as the pressure from rising housing prices and inflation is building up,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “The valuations of small-caps are too high and it looks like the bubble has started to burst.”

The CSI 300 Index sank 1.1 percent to 2,418.49. The Hang Seng China Enterprises Index slid 1.3 percent. Trading volumes on the Shanghai index were 3.6 percent below the 30-day average today, according to data compiled by Bloomberg. The Shanghai measure closed at the lowest this month.

Smallcaps Slump

Leshi Internet tumbled to 41.55 yuan, trimming its gain to 320 percent this year. Beijing TRS Information Technology Co. slumped 8.5 percent to 18.97 yuan. Lepu Medical Technology (Beijing) Co. lost 7.2 percent to 13.93 yuan.

The ChiNext index has rallied 84 percent this year, taking its estimated price-to-earnings ratio to 33 times for the next 12 months. The Shanghai Composite trades at 8.6 times, compared with the seven-year average of 15.4, according to data compiled by Bloomberg.

A measure of consumer-staples stocks in the CSI 300 slid 3.1 percent, the second most among 10 industry groups. Inner Mongolia Yili fell 4.1 percent to 48.90 yuan after posting a 132 percent gain this year through yesterday.

Tighter Liquidity

The People’s Bank of China has suspended selling reverse-repurchase contracts since Oct. 17, leading to a net withdrawal of 44.5 billion yuan ($7.3 billion) from the financial system last week.

The seven-day repurchase rate, a gauge of funding availability in the banking system, surged 47 basis points, or 0.47 percentage point, to 4.05 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That was the biggest advance since July 29. The overnight repo rate jumped 71 basis points, the most since June 20, to 3.80 percent.

With the economy on course to meet growth targets and inflation quickening, the central bank may start tightening policy, said Li Yiming, a Beijing-based analyst at Citic Securities Co., China’s largest brokerage.

Property Curbs

Consumer prices rose 3.1 percent in September as food costs advanced the most since May 2012, statistics bureau figures showed on Oct. 14. Home prices in China’s four major cities jumped last month by the most since January 2011, government figures showed this week.

China may issue new property curbs in the fourth quarter, the China Securities Journal reported today on its front page, citing unidentified analysts.

Separately, China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four largest rivals expunged in the first six months 22.1 billion yuan of debt that couldn’t be collected, up from 7.65 billion yuan a year earlier, filings showed. That didn’t pare first-half profits, which climbed to a record $76 billion, as provisions were set aside in earlier periods when the loans began souring.

Company Earnings

Huaneng Power fell to 5.55 yuan. The company said it posted third-quarter net income of 3.29 billion yuan, trailing the median analyst estimate of 3.87 billion yuan.

Sichuan province-based companies rallied after the Sichuan Daily said the province plans to unveil investment projects worth 4.3 trillion yuan. Sichuan Road & Bridge Co. surged by the 10 percent daily limit to 7.05 yuan. Sichuan Expressway Co. jumped 10 percent to 3.42 yuan.

The Shanghai index has rebounded 12 percent from its four-year low on June 27 on speculation the government will take reform measures to sustain long-term economic growth.

China may signal plans to ease the nation’s one-child policy, encourage companies to increase dividend payouts and start pilot programs to reform rural land rights and allow more free-trade zones during next month’s meeting of the Communist Party, according to Bank of America Corp.

There won’t be material reforms of state-owned enterprises nor a major breakthrough in reform of Hukou residency permits, Ting Lu, an economist at BofA, wrote in a report.

— With assistance by Shidong Zhang

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