China Stocks Drop to Three-Week Low on IPO Share Sales Concern

China’s stocks fell, sending the benchmark index to the lowest level in three weeks, as money-market rates surged on concern new share sales will divert funds from existing equities.

Shanghai Wangsu Science & Technology Co. tumbled 3.2 percent, dragging down a gauge of small-company shares in the ChiNext index. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. slid 1.5 percent to pace declines for material companies. Wuliangye Yibin Co., the nation’s second-largest maker of baijiu liquor, dropped 2.3 percent after posting lower first-half profit. Guanghui Energy Co. jumped by the daily limit as the company won government approval to import crude oil.

The Shanghai Composite Index retreated 0.6 percent to 2,195.82 at the close, the lowest level since Aug. 8. The one-day repurchase rate on the Shanghai Stock Exchange jumped to 45 percent, the highest level since December 2007. Six companies started to market initial public offering shares today. The Shanghai Securities News reported this week that a total of 10 IPOs will freeze about 800 billion yuan ($130 billion).

“The main concern for the market is IPOs this week and some investors are selling to either bid for IPO shares or to avoid the selloff caused by IPO fund-draining effect,” said Wei Wei, an analyst at West China Securities Co. in Shanghai.

The CSI 300 Index lost 0.7 percent to 2,311.28. The ChiNext fell 1.2 percent. The Hang Seng China Enterprises Index slipped 1.4 percent at 3:44 p.m. The Bloomberg China-US Equity Index, retreated 0.2 percent yesterday.

The one-day repo rate in Shanghai jumped from 1.37 percent as IPOs fueled demand for cash. The rate is set for the highest close since Dec. 2007, when the IPO of China Pacific Insurance Group Co. drew 2.8 trillion yuan of bids.

IPO Speculation

Chinese IPOs have rallied an average 94 percent from their issue price this year, or seven times more than the global average. That contrasts with lackluster demand among local investors to participate in the broader stock market.

New stocks have regained their reputation as can’t-lose bets in China just four years after that last frenzy ended badly -- a majority of IPOs in the second half of 2010 saddled investors with losses within a year. The soaring demand shows how regulatory efforts to ensure deals aren’t overvalued have led speculators to ramp up bets with borrowed money and hurt plans to let the market, rather than the government, set prices in the biggest emerging economy, said Ding Yuan of the China Europe International Business School.

Profit Growth

A measure of material stocks slid 1.3 percent, the biggest loss among 10 industry groups in the CSI 300. Baotou Rare-Earth fell for a third day. China Minmetals Rare Earth Co. dropped to a two-week low. Data today showed growth in industrial profits slowed to 13.5 percent in July from 17.9 percent in June.

Wuliangye Yibin dropped 2.3 percent after first-half profit slumped 31 percent from a year earlier. The 766 companies that have already released first-half earnings in the Shanghai Composite posted an average earnings growth of 11 percent, data compiled by Bloomberg showed.

In Hong Kong, Chinese developers fell on concern the biggest companies will miss their annual sales targets. The 13 largest developers that provided full-year sales targets achieved 49 percent of those goals by the end of July, the weakest level in at least two years, according to data compiled by Bloomberg.

Country Garden Holdings Co. tumbled 6.1 percent in Hong Kong for the biggest decline since April after the company announced plans to sell shares at a discount. Evergrande Real Estate Group Ltd. lost 3.2 percent.

The Shanghai Composite has rebounded 10 percent since mid-March on prospects China will reduce government ownership of state-owned enterprises and a link between exchanges in Hong Kong and Shanghai will fuel inflows.

Stocks Outlook

The Shanghai index may double in the next two years, spurred by optimism over the economy and the prospect the bourses link will attract funds into the mainland, Mark Matthews, the head of Asia research for Bank Julius Baer & Co., said in a Bloomberg Television interview today from Hong Kong.

“Momentum both in the economy and news flow has turned positive,” he said.

Huaxi Securities Co., Tebon Securities Co., Hongyuan Securities Co. and Haitong Securities Co. confirmed they are among the mainland brokerages taking part in a trial run of the Hong Kong-Shanghai trading link this weekend. A press official from the Shanghai Stock Exchange declined to comment on whether there’s a test of the connect.

A sub-index of energy shares advanced 1.1 percent. China Petroleum & Chemical Corp. jumped 1.5 percent after China Life Insurance Co. and ENN Energy Holdings Ltd. said they want to take part in the oil refiner’s stake sales of its fuel-retailing business.

The Shanghai index is valued at 8 times 12-month projected earnings, compared with the five-year average multiple of 11.1, according to data compiled by Bloomberg. Trading volumes in the index were 22 percent below the 30-day average today.

— With assistance by Shidong Zhang

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