China Stocks Fall, Capping Biggest Monthly Drop Since May on Tight Credit

Most Chinese stocks fell, driving the benchmark index to its biggest monthly loss since May, as smaller companies slumped on speculation tighter credit will curb earnings growth and U.S. consumer confidence declined.
Baoshan Iron & Steel Co. slid to a one-week low after first-half profit dropped. Shanghai Kaibao Pharmaceutical Co. and Hangzhou Silan Microelectronics Co. led declines for small companies after China Business News reported up to 70 percent of small and medium-sized enterprises may not survive. Banks rebounded, led by Industrial & Commercial Bank of China Ltd.
“The stock market hasn’t shown signs of bottoming out and may continue to head downward for the short term,” said Yan Ji, investment director at HSBC Jintrust Fund Management Co., which manages $1.6 billion. “Investors should be cautious given the central bank’s determination to tighten monetary policy to fight inflation.”
The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 0.75 points, or less than 0.1 percent, to 2,567.34 at the 3 p.m. close, paring this month’s drop to 5 percent. About seven stocks fell for every five that rose on the gauge. The CSI 300 Index (SHSZ300) gained 0.2 percent to 2,846.78.
The Shanghai gauge has dropped 8.6 percent this year as the central bank raised interest rates five times and ordered lenders to set aside more cash as deposit reserves 12 times since the start of 2010 to contain inflation. It is valued at 11.8 times estimated earnings, compared with a record low of 11.6 times set on Aug. 22, according to daily data compiled by Bloomberg.

Smallcaps Slump

The China Federation of Logistics and Purchasing is scheduled to release a manufacturing index for August at 9 a.m. tomorrow. The gauge is expected to rise to 51 from 50.7 a month earlier, according to a Bloomberg survey. A reading above 50 indicates an expansion.
The ChiNext index of start-up companies slid for a second day after the central bank ordered lenders to set aside more reserves against margin deposits, boosting speculation liquidity will tighten. The ChiNext lost 1.4 percent while the index for Shenzhen small and medium enterprises fell 0.6 percent.
The China Business News cited Gu Shengzu, a vice chairman at the National People Congress’s internal and judicial affairs committee, as saying only about 10 percent of the small- and medium-sized companies are able to get loans from the standard banking system. These companies generate about 60 percent of China’s gross domestic product, according to BNP Paribas SA.
A gauge of technology companies retreated 0.6 percent, the most among the 10 industry groups in the CSI 300. The health- care measure slipped 0.2 percent. Shanghai Kaibao Pharmaceutical dropped 2.9 percent to 27.98 yuan. Shenzhen Glory Medical Co., a maker of medical equipment, fell 2.3 percent to 31.40 yuan. Hangzhou Silan Microelectronics slid 1.4 percent to 15.30 yuan.

Growth Concerns

Baoshan Steel, the listed unit of China’s second-biggest steelmaker, fell 0.8 percent to 5.29 yuan. Its first-half profit dropped 37 percent because of slowing demand from automakers and rising prices of iron ore and coal.
Chinese publicly traded companies conclude reporting semi- annual earnings today. Shanghai Composite companies reported an average 24 percent increase in first-half profit, slowing from a gain of 37 percent from last year, according to data compiled by Bloomberg. They beat analysts’ estimates by 3.4 percent on average, the data showed.
ICBC, the nation’s biggest listed lender, rose 1 percent to 4.14 yuan. China Construction Bank Corp., the second largest, added 1.1 percent to 4.59 yuan. China Minsheng Banking Corp., the nation’s first privately owned bank, climbed 1.2 percent to 5.99 yuan.

Consumer Stocks

China’s inflation rate may slow to 6 percent in August as prices have peaked, according to Shenyin & Wanguo Securities Co. Price increases for seafood and pork eased this month, Li Huiyong and Meng Xiangjuan, analysts at the brokerage, wrote in a report today. Consumer prices rose 6.5 percent in July, the fastest pace in three years. The August inflation figure is due Sept. 9.
Investors should avoid industries with overcapacity and excess inventories, including metals, automobiles and auto parts, said HSBC Jintrust’s Yan. He favors consumer staples producers as the government encourages domestic spending to offset a potential slump in exports.
Wuliangye Yibin Co., China’s second-biggest maker of white liquor by market value, climbed 2.5 percent to 40.40 yuan after the second-biggest producer of baijiu liquor said it will increase prices for its products by 20 percent to 30 percent starting Sept. 10.
China’s stock market has lost $353 billion in market value since the benchmark index reached this year’s high on April 18, according to data compiled by Bloomberg. The market’s losses escalated this month after the U.S. was stripped of the AAA credit rating and the European debt crisis fueled speculation global economic growth had stalled.
--Zhang Shidong. Editor: Allen Wan