China's Stocks Decline to 3-Month Low on Manufacturing Concern - Businessweek

China’s stocks fell to the lowest level in in three months, as the U.S. Federal Reserve cut its estimates for economic growth and preliminary Chinese manufacturing data for this month may show a contraction.

Jiangxi Copper Co. and China Shenhua Energy Co. the biggest copper and coal producers, declined at least 1.5 percent on concern slowing growth in the world’s biggest economy will curb demand for commodities. Industrial and Commercial Bank of China Ltd. and China Construction Bank Corp. fell after the four biggest lenders saw net deposits decline by a combined 460 billion yuan ($72 billion) in the first two weeks of this month.

The Shanghai Composite Index (SHCOMP) lost 0.5 percent to 2,280.42 as of 9:44 a.m. local time, set for the lowest close since March 30. The CSI 300 Index (SHSZ300) slid 0.2 percent to 2,552.61. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, fell 0.9 percent in New York. Chinese financial markets are closed tomorrow for a holiday.

“Investors have accepted the fact that the economy is going to be bad and stimulus measures will be slow,” said Chen Liqiu, a strategist at Jianghai Securities Co. in Shanghai. “There’s little impetus to enter the market so stocks will be dragged down in the near-term.”

Concerns that a growth slowdown is deepening and Greece will leave the euro area have pushed the Shanghai index down 7.4 percent from this year’s high set on March 2.

Preliminary data for Chinese manufacturing in June is scheduled to be released by HSBC Holdings Plc and Markit Economics at 10:30 a.m. local time. For May, the so-called flash PMI was 48.7, compared with the final reading for the purchasing managers’ index of 48.4 for the month. That was the seventh straight month of contraction for the HSBC and Markit gauge. A reading below 50 indicates contraction.

U.S. Outlook

A gauge of energy producers in the CSI 300 slid 2.1 percent, the most among 10 industry groups. The materials measure lost 1.5 percent. Shenhua Energy fell 1.9 percent to 23.47 yuan. PetroChina Co., the biggest energy producer, slumped 1 percent to 9.17 yuan. Jiangxi Copper declined 2.2 percent to 24.66 yuan.

The U.S. central bank cut its estimates for growth and said it sees little progress on unemployment during the rest of the year. The Fed lowered its estimate for U.S. 2012 gross domestic product growth to 1.9 percent to 2.4 percent, from 2.4 percent to 2.9 percent in April.

The Fed will expand its Operation Twist program to replace short-term bonds with longer-term debt by $267 billion through the end of 2012. That “should put downward pressure on longer- term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said.

Banks Drop

Chinese banks’ borrowing costs rose for a third week, the longest stretch in 2012, as a funding squeeze fanned speculation policy makers will relax lenders’ reserve requirements. Shibor, for 1-month yuan loans, climbed 51 basis points in June to 3.48 percent, after 5 months of declines caused by monetary easing. Industrial Bank retreated 1 percent to 12.84 yuan. China Merchants Bank Co. declined 0.5 percent to 10.98 yuan.

ICBC, the biggest lender, slid 0.5 percent to 3.92 yuan, while rival China Construction Bank lost 0.2 percent to 4.52 yuan. Those two banks along with Bank of China Ltd. and Agricultural Bank of China Ltd. saw net deposits drop by a combined 460 billion yuan in the first two weeks of June, the 21st Century Business Herald reported, citing an unidentified lender.

QFII Reform

The government will cut the minimum requirement on assets under management to $500 million from $5 billion for companies seeking a license under the Qualified Foreign Institutional Investor program, the China Securities Regulatory Commission said in a statement on its website yesterday. The regulator also said it will allow them to invest in the country’s interbank bond market.

“I doubt the impact will be great,” said Chen. “Foreign investors may be more appealed by H-shares as their valuations are lower.”

The Hang Seng China Enterprises Index (HSCEI) of mainland stocks is trading at a multiple of 7.6 times, compared with the Shanghai gauge’s 9.9 times estimated earnings. The Hong Kong-listed shares will rally 15 percentage points more than the Standard & Poor’s 500 Index, the U.S. benchmark, said Rupert Watson, the Southampton, England-based head of asset allocation at Skandia Investment Group, which oversees about $13 billion. The gains will be more if the euro-area sovereign-debt crisis is contained, he said.

“We’re heavily overweight on Chinese stocks,” Watson said in a telephone interview. “We believe China is in the process of a soft landing. Economic growth will probably bottom in the second quarter, with stronger growth in the second half, supported by further loosening of monetary and fiscal policy. Favorable valuations are also positive for the stocks.”

China ETF Declines

China appears to have engineered a “soft landing” after its biggest-ever fiscal stimulus in 2009, which is important for the whole region, Reserve Bank of New Zealand Governor Alan Bollard said.

The iShares FTSE China 25 Index Fund (FXI) (FXI), the biggest U.S.- listed China exchange-traded fund, lost 0.3 percent to $33.94, snapping a six-day rally.

American depositary receipts of China Unicom (Hong Kong) Ltd. (CHU) (CHU), based in Beijing, slid 4.8 percent to $13.35, the steepest drop since Feb. 6. The ADRs, each representing 10 underlying shares in the company, traded (CHU) 0.4 percent below the Hong Kong stock, the first discount in three days.

Unicom will introduce smartphones costing less than 700 yuan ($110) in China in the near future, 30 percent less than the cheapest devices it currently offers, President Lu Yimin told the GSMA Mobile Asia Expo in Shanghai yesterday, without providing a more specific time frame. The company currently offers handsets from Huawei Technologies Co. and ZTE Corp. costing less than 1,000 yuan apiece.

Network Trials

China Mobile Ltd.’s ADRs lost 0.8 percent to $52.96 after gaining in the previous three days. The company’s ongoing trial of fourth-generation TD-LTE network equipment is going smoothly and it has uncovered no issues with the technology, Chairman Xi Guohua said at the Shanghai meeting yesterday. The biggest bottleneck for adoption of the new standard is the devices’ abilities, he said.

China Mobile had a total of 64.3 million 3G users by the end of May, data on its website showed. That compared with 54.5 million at Unicom.

China Telecom Corp.’s ADRs sank 2.4 percent to $45.56. The ADRs traded 0.7 percent higher than the Hong Kong stock, the widest premium since June 7. Each ADR is equal to 100 underlying shares.

Baidu, Melco Crown

Baidu Inc. (BIDU) (BIDU), the biggest online search engine in China, dropped 3.6 percent, the most in two weeks, to $117.38. Shanda Games Ltd., the third-biggest online games operator in China, sank 5 percent to $4.14, the steepest slide since April 4.

Melco Crown Entertainment Ltd. (MPEL) (MPEL), a Macau casino operator, rose to a three-week high in New York after Sterne Agee & Leach Equity Research said a new resort will resume construction in 45 days. Melco’s ADRs added 3.2 percent to $12.28 in New York for a fourth day of gains.

Construction of Melco’s Studio City Macau resort will resume in about 45 days and begin operations within three years, Sterne Agee analyst David Bain said in a report yesterday, without citing a source for the information. Melco is better positioned than its competitors to take advantage of the expansion of Macau’s increasingly popular Cotai Strip, he said.

“The sentiment is pretty low right now,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New Work, said by phone yesterday. “Chinese policy makers really need to do something to help the economy rebound. They’ve been too cautious and they should be aggressive right now.”

-- Editors: Allen Wan, Chan Tien Hin

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net