China Stocks Fall on Rate Concern, Cap Longest Slide Since July

Dec. 28 （Bloomberg） -- China’s stocks fell for a fifth day, capping the benchmark index’s longest losing streak since July, on concern the government will need to step up increases in interest rates to curb inflation.

China Vanke Co. dropped more than 4 percent, leading a two- day slump for developers, after the government boosted rates over the weekend and Premier Wen Jiabao reiterated his goal for home prices to return to a “reasonable level.” Jiangxi Copper Co. and Aluminum Corp. of China Ltd. led declines for metal stocks on prospects tightening policies may slow economic growth.

“Investors’ response towards the rate increase was divided yesterday,” said Deng Changrong, a strategist at Huaxi Securities Co. in Shenzhen. “As the market moves downward, the pessimism and uncertainty seem to get stronger.”

The Shanghai Composite Index slid 48.41, or 1.7 percent, to 2,732.99 at 3 p.m., extending a 1.9 percent plunge yesterday, after the People’s Bank of China increased key one-year lending and deposit rates by a quarter percentage point on Christmas Day. The CSI 300 Index lost 1.8 percent to 3,044.93 today. The CSI Smallcap 500 Index retreated 2.5 percent, adding to a five-day, 9.4 percent slump.

The benchmark measure has fallen 17 percent in 2010, making it the worst performer among the world’s 14 biggest stock markets. The government has ordered banks to set aside more reserves six times this year and boosted interest rates twice to tame inflation and curb asset bubbles after record gains in lending and property prices. China reported inflation of 5.1 percent in November, exceeding the previous month’s 4.4 percent.

Property Bubbles

“China’s inflation rate may remain at a comparatively high level in the first half of next year,” said Liu Jianwei, a fund manager at Bosera Asset Management Co., which manages about 19 billion yuan in Shenzhen.

A rate increase earlier rather than later more effectively manages inflation expectations, Jian Chang, an economist at Barclays Plc, said in a report. Boosting borrowing costs before the new year will also have a greater tightening effect, the economist wrote in a report dated yesterday.

A gauge tracking developers in Shanghai Composite slid 3.5 percent, after falling 2.2 percent yesterday. Vanke, the nation’s biggest listed property developer, dropped 4.8 percent to 8.33 yuan. Poly Real Estate Group Co., the second biggest, fell 6.2 percent to 12.91 yuan.

Premier Wen said on National Radio yesterday that measures to curb the country’s property market weren’t well implemented and reiterated his goal for home prices to return to a “reasonable level” during his term that ends in 2012.

The government will also increase the supply of affordable housing and introduce more measures to curb speculation, he said.

Commodity Stocks

China’s home prices rose for an 18th month in November as measures including suspending mortgages for third-home purchases and a pledge to speed up trials of property taxes failed to limits foreign capital inflows and cool property prices. The central bank boosted interest rates for the first time in three years in October and raised them for a second time on Dec. 25.

The decision to raise rates will help the nation curb bubbles in the domestic property market and stabilize inflation expectations, Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in a commentary published in today’s China Daily.

Gauges of material and energy producers in the CSI 300 declined 1.7 percent and 2.1 percent, respectively.

Jiangxi Copper, China’s biggest producer of the metal, lost 1.5 percent to 41.18 yuan. Aluminum Corp. of China, the listed unit of nation’s largest maker of the lightweight metal and also called Chalco, dropped 2.1 percent to 9.86 yuan.

Policy Views

Central bank advisor Li Daokui said more adjustments in China’s deposit rate, lending rate, and reserve requirement ratio are “very necessary” in 2011, especially in the first half, the 21st Century Business Herald reported in an interview.

The country may raise its reserve requirement ratio more frequently than interest rates next year, the 21st Century Business Herald, citing central bank adviser Xia Bin.

Consumer price increases may exceed 5 percent in 2011, the same paper reported, citing Liu Yuhui, a researcher with the Chinese Academy of Social Sciences. Consumer prices in the country may rise more than 5.5 percent in January, Liu said.

China Shenhua Energy Co., the biggest coal producer, retreated 3.6 percent to 24.16 yuan after benchmark power- station coal prices at Qinhuangdao Port fell to a seven-week low. Yanzhou Coal Mining Co., the nation’s second-largest coal producer, slid 3 percent to 27.26 yuan.