China’s Stocks Fall Most in Month on Speculation Rally Overdone

China’s stocks fell the most in a month, led by financial and energy companies, on speculation the benchmark index’s world-beating rally was excessive relative to earnings prospects.

Wintime Energy Co., a coal miner, slid 1.7 percent after rising 94 percent since July 22. Yanzhou Coal Mining Co. lost 1.4 percent, paring this year’s rebound from the April low to 30 percent. Poly Real Estate Group Co. and Ping An Insurance (Group) Co. fell at least 2.2 percent as a gauge of financial and property shares slumped the most among industry groups.

The Shanghai Composite Index slipped 0.8 percent to 2,202.44 at 10:06 a.m., poised for the biggest retreat since July 9. The Shanghai index, which has rebounded 11 percent from this year’s low, will probably end its rally within days and fall about 10 percent, according to Tom DeMark, the developer of market-timing indicators.

“We rose too much recently so there’s some profit taking,” said Zhang Haidong, an analyst at Tebon Securities Co. in Shanghai. “It should continue for a week or two and could stop around 2,150. The uptrend should still continue after that, though gains will be more gradual.”

The Shanghai index’s relative-strength index has reached 77.8 and trades at 8.2 times estimated 12-month earnings, compared with the March low of 7.27. The measure of China’s $3.5 trillion stock market has outperformed equity indexes in 46 emerging and developed countries in the past six weeks as signs of monetary easing, accelerated government spending and gains in manufacturing spurred speculation the nation’s economic growth will pick up.

Anti-Corruption Measures

The CSI 300 Index and the Hang Seng China Enterprises Index each lost 1.1 percent. Trading volumes in the Shanghai index were 49 percent above the 30-day average for this time of day, according to data compiled by Bloomberg.

Cheah Cheng Hye, the chairman of Hong Kong-based Value Partners Group, which runs the best-performing Greater China equity fund during the past five years, is predicting a further gain of about 15 percent for the Shanghai Composite by year-end. While President Xi Jinping’s anti-corruption measures may be a short-term drag on growth, they will make state-owned enterprises more efficient and help curb excessive debt, he said.

“I am quite optimistic,” Cheah said. “The market has bottomed out. We’re beginning to see the beginning of a recovery in the months of June and July. The strong performance may only be the beginning.”

The Bloomberg China-US Equity Index of the country’s most-traded shares in the U.S dropped 1.5 percent. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., declined 1.5 percent to $40.47 in the biggest retreat in six weeks. The Standard & Poor’s 500 Index fell 1 percent as energy shares tumbled and concern increased over escalating tensions in Ukraine.

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