China's Stocks Fall Most in Month as Small-Caps Lead Declines

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China’s stocks dropped the most in a month on heavy volume, led by smaller companies, as investors weighed whether an equity rebound had gone too far.

The Shanghai Composite Index slid 3.1 percent to 3,320.68 at the close, the most since Sept. 15. The ChiNext index of smaller companies slumped 6.6 percent after soaring 40 percent through Tuesday from last month’s low. Leshi Internet Information & Technology Corp. and East Money Information Co., the heaviest-weighted ChiNext stocks, both tumbled by the 10 percent daily limit. Jiangxi Copper Co. paced declines for material producers, tumbling 7.8 percent.

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“The market has accumulated decent gains and faces resistance as the index approaches the 3,400 to 3,500 level,” said Qian Qimin, an analyst at Shenwan Hongyuan Group Co. in Shanghai. “Investors were waiting for opportunities to lock in profits and when there were signs of some profit-taking, others followed suit.”

The CSI 300 Index of Shanghai and Shenzhen equities slid 2.9 percent. All of the measure’s 10 industry groups fell, with technology companies retreating 7 percent for the biggest decline. Hong Kong’s market was shut on Wednesday for a holiday.

Trading volumes in the Shanghai Composite were 60 percent higher than the 30-day average on Wednesday. The gauge has rebounded 8.8 percent in October, heading for the steepest monthly advance in six months, amid speculation the government will loosen monetary policy and announce more overhauls of state-owned enterprises to bolster the economy.

‘Expensive’ Valuations

The Shanghai index, dominated by big state-owned companies, is valued at 17 times reported earnings, while the ChiNext trades at a multiple of 71 times, according to data compiled by Bloomberg.

“The ChiNext index has risen too much too fast in its recent rebound and valuations are indeed expensive,” said Zhang Gang, a strategist at Central China Securities Co. in Shanghai.

Sub-indexes of technology and material companies in the CSI 300 fell at least 5.9 percent, the worst performers among the 10 industry groups. Yonyou Network Technology Co. and Hundsun Technologies Inc. both slumped 10 percent. Yunnan Chihong Zinc & Germanium Co. also plunged by the daily limit.

China needs a cut in lenders’ reserve-requirement ratios, according to a front-page commentary in the Economic Information Daily on Wednesday, which is owned by the official Xinhua News Agency. The People’s Bank of China has cut the amount of cash lenders must set aside as reserves three times this year and reduced interest rates five times since November, as the economy heads for its weakest annual expansion in more than two decades.

Margin traders increased holdings of shares purchased with borrowed money for a ninth day on Tuesday for the longest expansion in four months, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising to 614.6 billion yuan ($96.8 billion).

— With assistance by Shidong Zhang, Amy Li, and Amanda Wang

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