Money

Stocks hit by further tightening concerns

By Irene Shen (China Daily)
Updated: 2011-05-25 11:01

SHANGHAI - Stocks on the Chinese mainland fell for a fourth day on Tuesday. The retreat came on concern that government measures to cool inflation are slowing the world's second-biggest economy.

PetroChina Co, the nation's biggest oil company, lost 1.9 percent after Goldman Sachs Group Inc cut the country's economic growth estimates. Industrial and Commercial Bank of China Ltd led declines for lenders after the Securities Times cited investors as saying the central bank may further boost the reserve requirement ratios for lenders.

"Investors are concerned about the pace of economic growth after so many measures to cool the economy and the debt crisis in Europe," said Sun Chao, an analyst at Citic Securities Co, China's biggest-listed brokerage.

"They are simply selling as they are unwilling to take more risks for now."

Related readings:  China stock index futures close down -- May 24  Int'l board to be yuan-denominated

The Shanghai Composite Index dropped 7.5 points to 2767.06 at the 3 pm close. The measure has lost 9.5 percent from the close of 3057.33 on April 18, after earlier sliding as much as 10 percent, a sign that the market has entered a correction, according to analysts.

The central bank may suspend a sale of three-year notes this week and increase banks' reserve requirement ratios, the Securities Times reported, citing one market opinion. A suspension may also indicate the central bank is expecting a slowdown in growth, it said, citing another market opinion.

China may continue to raise interest rates, Joseph Yam, the former head of the Hong Kong Monetary Authority, said on Monday. The People's Bank of China aims to make the one-year deposit rate higher than the rate of inflation, Yam told reporters.

The central bank has increased reserve requirements for banks 11 times and boosted interest rates four times since the start of 2010 to cool consumer prices, which exceeded economists' estimates in April with an increase of 5.3 percent.

Recent rises in pork prices will likely push up China's inflation in May, according to the Financial News, a People's Bank of China publication. Each 20 percent increase in the price of pork will likely contribute 0.6 percentage points to the consumer price index, the newspaper said, citing Li Mingliang, an analyst with Haitong Securities Co.

Goldman Sachs said it wouldn't "rule out" a further decline of up to 10 percent for Chinese stocks as growth in the world's second-biggest economy slows and inflation accelerates.

"We would not rule out a correction of up to 5 percent to 10 percent near term, triggered by cut to earnings per share, but would buy on such dips given low earnings risks, valuation, and likely policy inflection," Goldman Sachs analysts said in a report on Tuesday.

It expects inflation to peak in June and forecasts "normalization of policy sometime in the third quarter in 2011", according to the report.

China's gross domestic product will gain 9.4 percent in 2011, less than a previous call of 10 percent, Goldman Sachs said. The US bank downgraded Chinese steel, aluminum and industrial stocks to "underweight" from "neutral", while keeping property and bank shares as top picks.

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