China Stocks Enter Bear Market on Inflation, Property Concerns

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By Bloomberg News

May 11 (Bloomberg) -- China’s stocks dropped, sending the benchmark index into a bear market, on concern the government will raise borrowing costs to combat inflation and unveil more measures to curb soaring housing prices.

The Shanghai Composite Index fell 1.9 percent, led by financial companies and commodity producers, after reports showed consumer prices rose the most in 18 months and property values in 70 cities jumped a record 12.8 percent in April.

“If inflation isn’t contained, the central bank will have to raise interest rates,” said Zhao Zifeng, who helps oversee about $10.2 billion at China International Fund Management Co. in Shanghai. “We’ll still need to gauge housing prices in the coming months as the previous crackdown measures were put in place not long ago. More tightening policies could follow.”

The Shanghai index has dropped more than 20 percent from a November peak, the definition of a so-called bear market, on speculation efforts to rein in the housing market will hurt earnings. Investor Marc Faber said on May 3 that China’s economy may “crash” within a year as stock and commodity price declines signal the property bubble is set to burst.

Bank of China Ltd. and China Merchants Bank Co. dropped at least 1.7 percent, while Poly Real Estate Group Co., the nation’s second-largest developer by value, plunged 2.7 percent.

The Shanghai Composite, which tracks the bigger of China’s stock exchanges, fell 51.18 to close at 2,647.57, the lowest in almost a year. The CSI 300 Index lost 2 percent.

China, Greece

The Shanghai gauge has slid 19 percent this year, the world’s worst performer after Greece among the 93 gauges tracked by Bloomberg, on concern government will increase efforts to curb speculation in the property market, hurting economic growth.

China’s consumer prices rose 2.8 percent in April from a year earlier, and property prices jumped 12.8 percent, the statistics bureau said today. New lending of 774 billion yuan, announced by the central bank, was more than any of 24 economists forecast. Faster inflation increases pressure on the government to boost borrowing costs for the first time since 2007 and allow the yuan to appreciate.

The gain in consumer prices compared with a 2.4 percent increase in March and the 2.7 percent median estimate of 30 economists surveyed by Bloomberg News. The government aims to contain full-year inflation at 3 percent after record lending drove economic growth of 11.9 percent in the first quarter.

‘Very Cautious’

“Though CPI is at a high level, the European debt crisis has made the government very cautious about raising interest rates,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Declines in housing prices are big possibility and that will help ease tightening expectations.”

U.S. stocks rallied the most in more than a year yesterday after European policy makers unveiled an unprecedented loan package worth almost $1 trillion an program of bond purchases to stop a sovereign-debt crisis.

Europe’s rescue package will free Chinese officials to focus on containing asset prices and inflation at home rather than worrying about the global recovery, central bank adviser Li Daokui said.

“The double-dip risk in the world economy is likely to be reduced to a minimum,” Li said in a telephone interview in Beijing yesterday. “China’s growth rate is not a problem this year, and the main policy focus should be on preventing excessive gains in asset prices and liquidity.” His comments are a personal view, he said.

More Reserves

The People’s Bank of China has ordered lenders to set aside more deposits as reserves three times in 2010. The government also imposed a ban last month on loans for third-home purchases and raised mortgage rates and down-payment requirements for second home purchases to curb housing prices.

“The latest round of these fine-tuning measures were only put in place a few weeks ago, so it is probably too soon to judge their effectiveness,” said Brian Jackson, a Hong Kong- based emerging-market strategist at the Royal Bank of Canada.

Poly Real Estate slid 2.7 percent to 10.66 yuan. Gemdale Corp., the fourth-largest developer, lost 2.6 percent to 6.08 yuan. Beijing News said property prices in the capital slumped more than a third over the past one month. Housing prices fell 31 percent for the week ending May 9 from the week ending April 11, to average price of 16,898 yuan per square meter, the newspaper reported today, citing statistics from consulting firm Comprehensive Real Estate Services Corp.

Chinese banks can withstand a 30 percent to 40 percent decline in home prices, the 21st Century Business Herald reported late yesterday on its website, citing unidentified bank officials. Bank of China slid 1.7 percent to 4.02 yuan. China Merchants Bank. dropped 1.9 percent to 13.33 yuan.

‘Played Its Course’

This year’s plunge in Chinese stocks has “played its course” and investors should consider buying shares including those of Chinese consumer companies, said Hamon Asset Management Ltd.’s Hugh Simon.

“The correction has been healthy for China and for the whole stock market in the region,” Simon, co-manager of the Dreyfus Greater China Fund, said in a Bloomberg Television interview. “We are through the consolidation and some of the stocks that went into it first are probably the ones you need to look at when they come out.”

Apart from consumer shares, property stocks have also “corrected very significantly,” said Simon.

Health-care stocks fell the most today in the CSI 300 Index, losing 2.8 percent. The losses pared the group’s advance this year to 2.3 percent.

--Zhang Shidong. With assistance from Shiyin Chen in Singapore. Editors: Allen Wan, Linus Chua

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-7014 or szhang5@bloomberg.net