By Bloomberg News, 12 Jan 2015
China’s stocks fell for the steepest three-day loss in 18 months amid concern a rally for the world’s best-performing equities market over the past year has been excessive relative to the outlook for the economy.
Aluminum Corp. of China Ltd. slumped 6.2 percent to lead declines for metal shares, paring a 12-month rally to 78 percent. PetroChina Co., the biggest energy company, retreated 3 percent before trade data tomorrow. Poly Real Estate Group Co. dropped 4.6 percent as a gauge of developers slid the most among industry groups in Shanghai. Real estate companies have been the best performers over the past year.
The Shanghai Composite Index (SHCOMP) dropped 2.4 percent to 3,206.28 at 1:08 p.m., heading for the lowest level since Dec. 30. The three-day retreat is the longest since China’s central bank announced an unexpected cut in interest rates in November to support the economy. UBS AG said today that valuations for large stocks have reached fair levels and the bull market may stall unless profits improve.
“The market has probably entered a correction period as there are sizeable gains for big caps already, ” said Wu Kan, fund manager at Dragon Life Insurance Co. in Shanghai. “We may see the index fall to the 3,100 level.”
The Shanghai measure rallied 1.6 percent last week for a ninth week of gains, the longest winning streak since May 2007. The index has surged 60 percent over the past year, the best performer among 93 global indexes tracked by Bloomberg, amid speculation the government will loosen monetary policy to support economic growth. The gauge traded at 12.3 times 12-month projected earnings last week, the highest level since May 2011, according to data compiled by Bloomberg.
‘Limited Upside’
“We expect the market to enter a period of fluctuation, with limited upside potential in the index in the short term,” UBS strategist Chen Li wrote in a note dated today.
The CSI 300 Index declined 2 percent. Hong Kong’s Hang Seng China Enterprises Index (HSCEI) slid 1.4 percent. The Hang Seng Index gained 0.1 percent, supported by rallies for Cheung Kong Holdings Ltd. and Hutchison Whampoa Ltd.
Gauges of commodity, financial and industry companies in the CSI 300 dropped at least 2.1 percent today. China XD Electric Co. slid 6.2 percent, trimming a 12-month rally to 125 percent. China Vanke Co., China Life Insurance Co. and Citic Securities Co. slumped at least 2.8 percent to pace losses for financial companies.
Growth Outlook
Tomorrow’s trade data will probably show exports grew 6 percent last month, while imports dropped 6.2 percent, according to the median estimate of economists surveyed by Bloomberg. Recent data have been weak. A report last week showed producer prices in December falling more than forecast. An official manufacturing gauge fell to the lowest level in 18 months last month, while industrial profits slumped by the most in two years in November and growth in aggregate financing trailed estimates.
Charlene Chu, the former Fitch Ratings Ltd. analyst known for her warnings over China’s debt risks, said that the dangers are increasing as the outlook for the nation’s growth deteriorates.
“We’ve got the biggest debt bubble that the world has ever seen and credit is continuing to grow twice as fast” as the economy, Chu, a partner of Autonomous Research Asia Ltd., said in an interview in Hong Kong today with Bloomberg Television’s Angie Lau. “We’ve got deflation looming on the horizon.”
China’s small-company stocks will continue to underperform large caps this year because of an increase in initial public offerings, UBS’s Chen said in an interview in Bloomberg’s Shanghai office today. The ChiNext rose 1 percent, adding to a 16 percent gain over the past year.
Penny Stocks
Twenty-two companies including Spring Airlines Co. and Wanda Cinema Line Co. will market initial public offering shares this week, which BOC International said will freeze about 1.4 trillion yuan ($225.3 billion).
As Chinese individual investors pour back into the world’s hottest stock market, they’re leaving their fingerprints all over the place. The most telltale sign — the Chinese equivalent of penny stocks, assets that have long held an allure for amateurs, are trouncing the benchmark index.
Shares in the CSI 300 that were quoted below 5 yuan (81 cents) at the end of September have since jumped an average 63 percent. That compares with a 35 percent gain for all index stocks and 11 percent for those priced above 50 yuan.
Chalco, whose mainland-traded A shares were priced at 3.88 yuan at the end of September, has gained 57 percent even after the company lost money in the year ended Sept. 30 and analysts predicted further losses in 2015. The firm’s domestic shares are valued at an 89 percent premium to their Hong Kong-listed counterparts. Chalco declined 4.2 percent in Hong Kong.
Cheung Kong jumped 14 percent and Hutchison Whampoa Ltd. surged 12 percent after billionaire Li Ka-shing announced a $24 billion restructuring of his two main companies. -BLOOMBERG
