Thursday, August 6, 2009

China’s Stocks Fall, Set for First Weekly Decline in Two Months

. Thursday, August 6, 2009

By stockOzone team

China’s stocks dropped, with the benchmark index set for its first weekly loss in two months, as developers and materials producers fell after China Construction Bank Corp. said it will cut lending and metal prices slumped.

Gemdale Corp. lost 3 percent and Poly Real Estate Group Co. declined 1.7 percent. Construction Bank President Zhang Jianguo said the world’s second-largest bank by market value will reduce new loans by about 70 percent to avert a surge in bad debt. Jiangxi Copper Co. and Aluminum Corp. of China Ltd., the nation’s two biggest producers of the metals, retreated more than 3 percent.

The Shanghai Composite Index fell 47.68, or 1.4 percent, to 3,308.65 as of 1:09 p.m. The gauge is down 3.1 percent this week, heading for its first weekly loss since the five days to June 12, on signs the central bank will rein in lending to avert bubbles in equities and property. The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, declined 1.5 percent to 3,608.45.

“I doubt there will be as much liquidity inflow for the rest of the year as in the first half,” said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million in assets. “A correction in the next two or three months is justified.”

An 81 percent gain in the Shanghai index this year and rebound in property prices is fueling speculation some of the record 7.37 trillion yuan ($1.1 trillion) of bank loans have been funneled into stocks and housing.

‘Too Fast’
Average prices for new homes rose 6.3 percent in June in 36 Chinese cities, according to government data, even as urban unemployment rose and wage growth for workers in cities slowed.

“We noticed that some loans didn’t go into the real economy,” Zhang said in an interview yesterday at the bank’s headquarters in Beijing. “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.”

Gemdale lost 3 percent to 17.20 yuan. Poly Real Estate, China’s second-largest developer by market value, fell 1.7 percent to 26.70 yuan, set for a second weekly decline.

Construction Bank plans to extend about 200 billion yuan of loans in the second half, down from 708.5 billion yuan in the preceding six months, Zhang said.

Declining metal and oil prices drove losses by commodities producer. Indexes of energy and materials producers are the best performers on the CSI 300 this year, with both more than doubling as bank lending and 4 trillion yuan of government stimulus spending spur a recovery in the world’s third-largest economy.

Metal, Oil
Jiangxi Copper lost 3.4 percent to 42.95 yuan, paring its annual gain to 330 percent. China Petroleum & Chemical Corp. slid 3.5 percent to 13.77 yuan, set for its worst weekly loss in five months. Aluminum Corp. of China, the nation’s biggest maker of the lightweight metal, fell 5.5 percent to 17.87 yuan. Zhuzhou Smelter Group Co., the country’s largest producer of refined zinc, sank 3.6 percent to 14.75 yuan.

Copper dropped 2.1 percent in New York yesterday, the most since July 8 and crude oil slid 3 percent. Aluminum for November delivery in Shanghai, the market’s most active contract, fell 1 percent today, while zinc fell 1.5 percent to 15,100 yuan.

The Shanghai Composite posted its best monthly gain in two years in July, as the lifting of a nine-month moratorium on initial public offerings and the surging stock market drew investors at the fastest pace in more than a year. Investors opened more than 700,000 accounts to trade stocks last week, the most since January 2008.

This is one “warning” signal that the market is becoming overheated, Vincent Chan, a Hong Kong-based analyst at Credit Suisse Group AG, wrote in a note to clients.

China stocks are expensive, although “not a full-blown bubble yet,” Chan said. “If a healthy correction does not happen in the next few months and the market continues to surge ahead, fundamental investors should start to worry.”

Stocks on the gauge trade at 36 times reported earnings, near an 18-month high and twice the average of emerging markets.

Disclosure: Author does not own any of the stocks discussed here.

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