China’s Stocks Fall on Concern Rate Increases May Be Imminent

China’s stocks fell, erasing the benchmark index’s gains this year, on speculation the government will announce increases in interest rates and bank reserve requirements as early as today to curb inflation.

Jiangxi Copper Co. and Aluminum Corp. of China Ltd. led declines for material producers after metal prices slumped and the China Securities Journal said the government may add price controls to tame rising consumer prices. Industrial Bank Co. and Bank of Beijing Co. dropped more than 1 percent on concern tighter monetary policies will slow loan growth.

“There is speculation that the central bank will further tighten monetary policies by raising either interest rates or reserve requirements,” said Luo Bin, general manager at Shanghai Mingyu Xiaoyang Investment Management Co., which manages the equivalent of $60 million. “I don’t see any good opportunity for stocks unless there’s an easing.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 36.4, or 1.3 percent, to 2,791.34 at the 3 p.m. close. After the market close, the central bank ordered banks to set aside more reserves by 50 basis points from Jan. 20. It’s the first move this year after six increases in 2010.

The Shanghai gauge lost 1.7 percent this week, the most since the week ending Dec. 24. The CSI 300 Index slid 1.6 percent to 3,091.86. The Shanghai measure plunged 14 percent in 2010, the most among the world’s 10 biggest stock markets, after Premier Wen Jiabao’s government ordered banks to set aside more reserves six times and boosted interest rates twice to curb asset bubbles after record gains in lending and property prices.

A gauge of financial companies in the CSI 300 including banks dropped 1.1 percent. Industrial Bank slid 2.7 percent to 26.09 yuan. Bank of Beijing fell 1.9 percent to 11.92 yuan.

People’s Bank of China officials weren’t available to comment on today’s speculation about interest rates, requesting faxed questions.

Money Rates

China’s benchmark money-market rate advanced the most in more than two weeks on speculation reserve requirements for lenders will be increased again to combat inflation.

The seven-day repurchase rate, which measures lending costs between banks, had its biggest gain since Dec. 29 after Li Dongrong, assistant governor of the People’s Bank of China, said the nation is facing pressure on inflation and inflows, in a speech published on the central bank’s website today.

“We expect continued decisive monetary tightening, via reserve-requirement hikes as well as rates, in the first half,” said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong. “Emphasis is likely to be on liquidity management and reserve-requirement hikes are likely any time.”

The repo rate advanced 22 basis points to 2.56 percent today, according to a daily fixing published at 11 a.m. by the National Interbank Funding Center.

Inflation Outlook

Consumer prices jumped 5.1 percent in November, the most in 28 months, on surging food costs. The inflation rate likely rose more than 5.1 percent last month, Cheng Siwei, former chairman of the Standing Committee of the National People’s Congress, said at a forum today, Dow Jones reported. December inflation data will be released Jan. 20.

China’s inflation situation is facing “upside risks” amid surging food prices, Citigroup Inc. said in a report.

“Investors expect inflation to be still at a high level in January and in coming months,” Shanghai Mingyu’s Luo said.

China won’t rule out introducing new price control measures if inflationary pressure in the first quarter is too great, the China Securities Journal reported, citing Zhou Wangjun, deputy director of the pricing department at the National Development and Reform Commission.

Inflation remains “relatively large” so far in the first quarter, compared with last year, Zhou was cited as saying.

Commodity Stocks

The materials index in the CSI 300 dropped 3.4 percent today, adding to the weekly loss of 5.9 percent, the most among the 10 industry groups. Jiangxi Copper, the nation’s biggest copper producer, slid 8 percent to 38.57 yuan. Yunnan Copper Industry Co. slid 7.5 percent to 24.70 yuan. Aluminum Corp. of China fell 2 percent to 9.97 yuan.

Copper for three-month delivery on the London Metal Exchange fell as much as 0.7 percent to $9,551 a metric ton, and traded at $9,580 at 2:39 p.m. in Singapore, trimming this week’s gain to 1.8 percent.

“In the near term, at least before Chinese New Year, I doubt we’ll see a strong rally as physical trade is lackluster,” said Wu Zhengzheng, an analyst at China International Futures Co. （Beijing）。 The week-long Chinese holiday, when many plants suspend output, starts Feb. 2.

April-delivery metal on the Shanghai Futures Exchange lost as much as 1 percent to 71,010 yuan （$10,771） a ton.

China’s statistics bureau may release December home prices for 70 cities today or tomorrow. The median estimate of six economists in a Bloomberg survey is for a 7 percent gain from December 2009, compared with a 7.7 percent increase last month.

Cosco Shipping Co. slid 3 percent to 7.68 yuan. About 380 million shares will become tradable on Jan. 18, the company said in a Shanghai Stock Exchange filing today.

--Irene Shen, Zhang Shidong. With assistance from Kevin Hamlin in Beijing. Editors: Allen Wan, Richard Frost