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China Stocks Drop Most in 3 Weeks on ‘New Economy’ Share Losses

By Bloomberg News
July 09, 2014 3:48 AM EDT

China’s stocks fell the most in almost three weeks, as technology and health-care companies slumped amid concern earnings growth will disappoint investors.

Anhui USTC iFlytek Co. slid 8.1 percent, leading declines for technology shares. Jiangsu Hengrui Medicine Co. lost the most in four months. Bank of China Ltd. dropped 2.8 percent in Hong Kong after China Central Television alleged the lender violated foreign-exchange regulations. Data today showed China’s producer prices fell in June at the slowest pace in more than two years, while the inflation rate grew less than estimated.

The Shanghai Composite Index (SHCOMP) fell 1.2 percent to 2,038.61 at the close. China International Capital Corp. and UBS AG say smaller companies’ profits may trail analysts’ estimates in the first-half earnings period that began this month.

“The chance is a bit low that first-half earnings will exceed expectations,” said Dai Ming, a money manager at Hengsheng Hongding Asset Management Co. in Shanghai, which oversees about $193 million. “The market isn’t that sensitive to inflation data as it has reached a consensus that the economy is stabilizing.”

The Shanghai measure has slid 3.7 percent this year amid concern the resumption of new share sales will divert funds from existing equities and falling property prices will drag down the economy. China’s corporate profit growth may slow to 6 percent in the second quarter from 8.5 percent in the first quarter, according to Zheshang Securities Co.

The CSI 300 Index fell 1.5 percent. The Hang Seng China Enterprises Index (HSCEI) dropped 1.7 percent at 3:20 p.m. The MSCI China index slid for the first time in eight days, losing 1.7 percent. The Bloomberg China-US Equity Index fell 1.6 percent yesterday.

New Economy

The ChiNext index plunged 1.9 percent, joining a slump in U.S. small-cap stocks. The Nasdaq Composite Index fell 1.4 percent yesterday for the biggest drop in two months as concern grew that equities have rallied too far, too fast.

Gauges of technology and health-care stocks in the CSI 300 dropped 2.7 percent and 1.8 percent respectively today, the most among 10 industry groups. The technology gauge has gained 25 percent since the start of last year, while the drug measure climbed 6.3 percent. That compares with a 15 percent slump for the CSI 300.

Anhui USTC iFlytek tumbled the most since Oct. 22 after shareholders reduced holdings in the company, said Xiong Xin, an analyst at Guotai Junan Securities Co. Technology stocks have risen considerably so some investors may also see this as a profit-taking opportunity, he said.

Jiangsu Hengrui fell 3.6 percent, paring a rally to 26 percent over the past year. Yunnan Baiyao Group Co., a manufacturer of traditional Chinese medicine, slid 4.3 percent.

Bank Losses

After surging at least 20 percent for the biggest gains in China’s stock market last year, gauges of technology of health-care shares have all lost at least 10 percent. The companies, tied to what analysts have dubbed China’s “new economy,” are now falling in tandem with “old economy” stocks in state sectors such as commodities and finance that fueled growth in the last decade.

Bank of China lost 0.8 percent in Shanghai. Industrial & Commercial Bank of China Ltd. dropped 1.4 percent. Some banks in China help clients move “dirty money” overseas and violate the nation’s forex regulations through some forex products, China Central Television reported, without citing anyone.

Bank of China can help customers move large amounts of money to overseas destinations through a product called Youhuitong, CCTV reported, citing several unidentified bank employees. Three calls to a Bank of China press officer for comment went unanswered.

Inflation Data

The nation’s producer-price index declined 1.1 percent in June, the National Bureau of Statistics said, compared with the median estimate of analysts for a 1 percent drop. The consumer-price index increased 2.3 percent, below projections for a 2.4 percent gain.

The data showed that the drop in producer prices was the smallest since April 2012. It compared with a 1.4 percent decline in May and was the 28th straight loss, extending the longest streak of declines since a 31-month run from 1997 to 1999. Consumer inflation compared with 2.5 percent in May.

“Deflation is not a threat,” Lu Ting, head of Greater China economics at Bank of America in Hong Kong, said in a note. Consumer inflation suggests aggregate demand is still weak and the pace leaves “enough space for additional mini-stimulus measures if they are necessary,” Lu wrote.

Trade data scheduled for tomorrow is forecast to show exports grew 10.4 percent in June from 7 percent in May. Economic growth data for the second quarter is set for July 16.

Property Threat

Investors are too sanguine about China’s property market and should take profits on equities in the MSCI China index after a 10 percent rally since the May peak, Bank of America Corp. equity strategist David Cui wrote in report dated yesterday. They are too optimistic because real interest rates may stay high for a longer period and the central government is unlikely to roll out pro-property measures until “things are truly nasty,” he wrote.

The Shanghai Composite is valued at 7.5 times 12-month projected earnings, compared with 31 times for the Chinext, according to data compiled by Bloomberg. Trading volumes in the index were 34 percent above the 30-day average, while price swings plunged to a record low, data showed.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Allen Wan, Phani Varahabhotla

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