China Stocks Fall on Last Day Before Link Start as Brokers Drop

Chinese stocks fell on the last trading day before the start of the trading link between Hong Kong and Shanghai amid concern recent rallies were excessive.

China Communications Construction Co. and China CAMC Engineering Co. led declines for industrial companies with losses of more than 3 percent. Haitong Securities Co. slid 1.5 percent in Hong Kong, paring gains to 19 percent since mid-October. Energy and material shares also declined before the release of data on money supply and new bank lending. China’s broadest measure of new credit missed economists estimates in October, a report released after the market close showed.

The Shanghai Composite Index fell 0.3 percent to 2,478.82 at the close, trimming this week’s gain to 2.5 percent. The 14-day relative-strength index, measuring how rapidly prices have advanced or dropped during a specified time period, was at 70.7 yesterday, the fourth day above 70. Readings above 70 indicate a price may be poised to fall.

“The market seems to be suffering from the ‘sell-on-the news’ mode given the exchange link has already pushed up share prices significantly,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “You cannot expect the index to keep rising by the same magnitude in the next month or two. The short-term correction has set in.”

The CSI 300 Index added 0.1 percent. Hong Kong’s Hang Seng China Enterprises Index lost 0.4 percent, while the Hang Seng Index added 0.3 percent. The Bloomberg China-US Equity Index, the measure of the most-traded U.S.-listed Chinese companies, added 0.2 percent yesterday.

Link Prospects

The Shanghai measure has risen 17 percent this year as funds flowed into Chinese equities ahead of the link, which starts Nov. 17. The program will allow a net 23.5 billion yuan ($3.8 billion) of daily cross-border purchases. China is counting on demand from foreign money managers to boost equity valuations, turn Shanghai into a global financial center and increase global use of the yuan.

After the market close, China said it will waive a capital-gains to for foreign investors buying mainland stocks, bringing clarity to its tax laws before opening its markets through an exchange link with Hong Kong.

WaveFront Capital Management Partners LP, whose chairman is Burton Malkiel, won’t start buying mainland shares at the start of the link, said Jonathan Masse, its chief investment officer.

The U.S. fund manager, which invests in Chinese stocks, will watch the link “very closely” and may no longer need to apply for the Qualified Foreign Institutional Investor program if “things go smoothly,” he said in an e-mailed response to questions.

Brokers Drop

The exchange link between Hong Kong and Shanghai will have a “good” debut even as technical hurdles such as access to offshore yuan may hinder a strong rally for stocks, Irene Chow, head of China equity research at the private banking unit of Credit Suisse Group AG in Hong Kong, said in a phone interview yesterday.

Chinese stocks will get a boost from the link and prospects of monetary easing to support the economy, she said. Credit Suisse has an overweight allocation on China’s stocks and a 12-month forecast of 12,200 for the Hang Seng China index.

The Shanghai index is valued at 9.1 times 12-month projected earnings, compared with the multiple of 6.9 for the H-share index, according to data compiled by Bloomberg. Trading volumes in Shanghai were 4.2 percent lower than the 30-day average today.

Soochow Securities Co. and Guoyuan Securities Co. both fell 3.4 percent. Brokerages have been rallying on speculation the link will boost their earnings. Moody’s Corp. said the connect program may generate an extra 5 billion yuan in industry sales.

Economic Data

China Communication Construction plunged 3.2 percent after jumping 40 percent over the past three weeks. China CAMC slid 3.4 percent, paring gains to 34 percent over the same period. Chinese infrastructure stocks rallied as President Xi Jinping pledged $40 billion to set up a Silk Road Fund that will finance the construction of infrastructure linking markets across Asia.

A gauge of material shares in the CSI 300 fell 1 percent for the biggest drop among the 10 industry groups. Rising Nonferrous Metals Share Co. lost 4.5 percent, while Jiangxi Copper Co. dropped 2.8 percent.

China’s broadest measure of new credit missed economists estimates in October, suggesting liquidity injections from the central bank haven’t been enough to spur a pickup in lending as the economy slows.

Aggregate financing was 662.7 billion yuan, the People’s Bank of China said today, compared with the 887.5 billion yuan median estimate in a Bloomberg survey of analysts.

Premier Li Keqiang said the country can achieve its 7.5 percent growth target this year amid emerging new momentum, according to transcript of his speech posted on the Xinhua News Agency’s website. The economy will continue to face downward pressure next year while the basics remain unchanged, he said.

— With assistance by Shidong Zhang

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