China Stocks Fall Most in Three Weeks on Bets Yuan Will Weaken

  • Industrial firms, small-cap shares lead losses on mainland
  • Investors also worried about state fund sell-off: Jinkuang

Fed Moves: What Have Markets Priced In?

Chinese stocks dropped the most in three weeks, led by industrial companies and small-cap shares, amid concern that a weaker yuan will limit prospects for further stimulus and state-backed funds will sell shares.

The Shanghai Composite Index declined 0.8 percent at the close. Beijing Originwater Technology Co. posted its biggest loss since February. Hong Kong’s Hang Seng Index rose 0.3 percent, reversing a loss of as much as 0.6 percent. The ChiNext gauge of small-cap companies slid the most since July 27.

The offshore yuan weakened to its lowest level in three weeks as increasing speculation the Federal Reserve will raise interest rates this year drove up the dollar. China’s central bank has kept borrowing costs on hold since October. China Securities Finance Corp. and other government-linked funds sold bank shares after the nation’s benchmark equity index jumped to a seven-month high, people with knowledge of the matter said last week.

“To stabilize the yuan, the People’s Bank of China may have to reduce liquidity in the domestic market,” said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong. “The market will be consolidating in the short term.”

The move by CSF, which was armed with more than $480 billion to prop up share prices during last summer’s rout, may signal confidence among Chinese policy makers that the $6.5 trillion market is growing strong enough to stand on its own. CSF’s biggest holdings at the end of last year were in financial companies, whose heavy weightings in benchmark indexes make them prime candidates for government intervention.

“Investors are still nervous about the state fund’s reported sell-down, which tends to reflect the government’s view on whether prices are getting too high,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. “The national team may be seeking to prevent a stock bubble.”

Avic Capital Co. slumped 9.7 percent in its biggest loss since February, while Avic Aircraft Co. fell 4.9 percent. Train maker CRRC Corp. slipped 2.4 percent in Shanghai, adding to the CSI 300 industrial gauge’s 1.7 percent loss. Beijing Originwater Technology, a designer and builder of sewage treatment plants, lost 5.9 percent. Offshore Oil Engineering Co. retreated 2.5 percent in Shanghai as crude fell in New York.

Bank shares gained in Shanghai before they release second-quarter earnings. Industrial & Commercial Bank of China Ltd. rose 0.7 percent, while Agricultural Bank of China Ltd. and Bank of China Ltd. both advanced 0.6 percent.

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