Markets

Stocks see first dip in three days

By Zhang Shidong (China Daily)
Updated: 2010-11-23 09:10

Banks decline after authorities boost amount that lenders must set aside

SHANGHAI - China's benchmark stock index fell for the first time in three days on Monday as banks declined after policymakers boosted the amount of money that lenders must set aside, overshadowing gains for consumer staple producers.

The Shanghai Composite Index dropped 0.15 percent to 2,884.37 at the 3 pm close on Monday, extending declines after its biggest two-week decline since May on speculation that monetary tightening will crimp economic growth. More than two stocks rose for each that fell on Monday on the gauge, which swung between gains and losses more than 10 times. The CSI 300 Index slid 0.22 percent to 3,171.94 on Monday.

China Construction Bank Corp dropped 2.3 percent after the central bank ordered a 50 basis point increase in reserve ratios. Poly Real Estate Group Co lost 1.21 percent on concern mortgage lending will decline. Gansu Dunhuang Seed Co paced an advance by agricultural companies after Goldman Sachs Group Inc said grain prices will rise next year, while ZTE Corp rose among telecommunication companies on speculation the government will provide support to the technology industry.

Investors "should use this opportunity to buy on dips for organic growth sectors, such as agriculture machinery, software and advanced manufacturing and even the consumer sectors, like food and beverage, department stores and supermarkets", said Steven Sun, head of China equity strategy at HSBC Holdings Plc, in an interview with Bloomberg Television on Monday.

"When a country is in an inflation-fighting mode, it's typically not good for equities," said Jim Oberweis, who oversees $10.3 billion as the president of Oberweis Asset Management Inc, in Lisle, Illinois, on Friday. "The growth story is still positive, but I'm a little concerned that inflation will be a cap on the stocks."

The Shanghai Composite has lost 8.7 percent since reaching a seven-month high on Nov 8 on speculation the government will raise interest rates and impose price controls.

Officials are seeking to rein in the money supply after the US Federal Reserve Board expanded US stimulus with a plan to buy $600 billion of Treasuries, spurring capital flows into Asia.

Inflows of money from the trade surplus, foreign direct investment, and investors betting on gains by the yuan threaten to propel consumer prices after unprecedented lending by banks flooded the economy with cash from late 2008. Consumer prices rose 4.4 percent in October from a year earlier.

"People had thought we were nearer the end of the China tightening cycle, and China is now giving a very clear indication that they're very intent on conquering inflation," Philippe Langham, who manages the $653 million RBC Emerging Market Fund in London, said in an interview on Friday. "The tightening is being extended further than market participants had thought."

Gansu Dunhuang Seed climbed 1.27 percent to 31.94 yuan ($4.81) and Shandong Denghai Seeds Co increased 0.61 percent to 66.30 yuan on Monday. Goldman Sachs initiated coverage of the two companies with "neutral" ratings.

China's grain prices will "rise steadily" at about 10 percent next year, benefiting the nation's seed and fertilizer companies, according to a Goldman report by Jessie Pinglun Lai and Chris Shiu.

Other producers of consumer staples also gained. Kweichow Moutai Co rose 1.91 percent to 178.51 yuan on Monday. Inner Mongolia Yili Industrial Group Co soared 2.65 percent to 41.77 yuan.

Indexes tracking telecommunications and technology stocks rose at least 4 percent. ZTE gained 5.94 percent to 28 yuan, the most since Oct 8.

Bloomberg News

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