2010-08-04 13:38

SHANGHAI - China's stocks fell, sending the benchmark index to the biggest loss in two weeks, on concern the government will be constrained in relaxing its policy curbs as higher agriculture prices spur inflation.

Industrial & Commercial Bank of China Ltd and Poly Real Estate Group Co retreated more than 1 percent after the Securities Times reported the central bank may increase in October the amount of reserves lenders have to keep. PetroChina Co dropped the most in two weeks after its parent said crude oil demand growth may continue to slow in the third quarter.

"The market may have been too optimistic in its anticipation of a relaxation in economic policy," said Zhou Xi, a strategist at Bohai Securities Co. "There's concern that inflation will trend up even as growth slows, which will limit policy room for the government."

The Shanghai Composite Indexfell 1.7 percent to 2,627.00 at the close, the biggest decline since July 15. The CSI 300 Index dropped 1.8 percent to 2,865.97. Stocks extended losses in the afternoon on concern July inflation may exceed analyst estimates.

Inflation may have quickened in July, topping the 2.9 percent annual rate in June, as the worst flooding in more than a decade may cut production of rice, cotton and pork, hampering government efforts to keep consumer price gains under 3 percent, according to Li Qiang, managing director at Shanghai JC Intelligence Co.

The statistics bureau will release July data on consumer prices, retail sales, industrial production and fixed-assets investment on Aug 11. Morgan Stanley said in a report July 28 that consumer prices may have risen 3.3 percent last month because of higher vegetable and pork prices.

HSBC Private Bank's Arjuna Mahendran, who predicted a decline in China's stocks in January, said July 29 the country's month-long equities rally may falter if the government isn't able to boost the economy and contain inflation.

The Shanghai index rallied 10 percent last month, the most in a year, as investors bet slowing growth would give the authorities more room to ease loan curbs. Data on Monday showed China's July manufacturing data were the weakest in more than a year as the government clamped down on property speculation and investment in polluting and energy-intensive factories.

Hang Seng gains

Hong Kong stocks rose, lifting the benchmark index to the highest level in more than three months, after HSBC Holdings Plc reported better-than-estimated pre-tax profit.

The Hang Seng Index climbed 0.2 percent to 21457.66, its highest close since April 26. That drove the measure's 14-day relative strength index to 71, above the 70 threshold that indicates to some traders that prices are set to decline.

The Hang Seng China Enterprises Index of H shares of Chinese companies retreated 0.5 percent to 12120.83.

Bloomberg News