China's Stocks Drop Most in 2 Weeks on Inflation, Capital Control Concerns

Seems to me that the value of equities would increase on rising inflation data not decrease....Batman is not as smart as Bloomberg news and never will be. For Bloomberg always finds a way to develop logic and connect the dots. Hey, if they are so good at discerning the essence (see Aristotle) why don't they just start speculating in the free market. But of coarse they would then need to risk Mr. Bloomberg's capital. In short, never read too much into a headline. Cynical I know....

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(Bloomberg)--China’s stocks fell the most in two weeks on concern rising consumer prices and surging fund flows may spur the government to tighten monetary policy and increase capital controls. Industrial and Commercial Bank of China Ltd. dropped the most in almost seven months, pacing declines for lenders, before economic data tomorrow that will probably show the consumer price index rose 4 percent in October. China Vanke Co. and Poly Real Estate Group slid more than 3 percent after higher borrowing costs failed to lower home prices in October.

“Inflationary expectations are high and the market is anticipating further measures by the government to damp price increases,” said Wang Hui, a Changsha, China-based strategist at Founder Securities Co. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 34.96, or 1.1 percent, to 3,100.04 at the 11:30 a.m. break. The CSI 300 Index fell 1.2 percent to 3,480.99, as losses for financial companies overshadowed gains for health-care stocks.

Banks dropped on the prospect faster inflation may lead to higher borrowing costs, hurting loan growth. ICBC slid 3.6 percent to 4.61 yuan. Huaxia Bank Co. lost 3.9 percent to 12.39 yuan. China Merchants Bank Co. fell 3.5 percent to 14.64 yuan. Government data due for release tomorrow will show the inflation rate rose 4 percent in October, according to the median estimate of 28 economists surveyed by Bloomberg. That would be the highest in two years. The government’s full-year inflation target is 3 percent.

Home Prices

October consumer prices may “surprise to the upside,” driven by a rapid increase in food prices and heightened inflation expectations, according to Wang Qing, chief China economist at Morgan Stanley. China may “send a signal to both the market and international policy community ahead of the G20 summit” if consumer price inflation for October was significantly higher than market expectations, Wang said.

China posted a larger-than-forecast $27.1 billion October trade surplus, the day before Group of 20 leaders including Presidents Barack Obama and Hu Jintao meet in Seoul to tackle global imbalances in spending and capital flows. Exports rose 22.9 percent from a year earlier and imports climbed 25.3 percent, the customs bureau said on its website today. A gauge of property companies slid 3.1 percent, the most among the five groups in the Shanghai Composite. China Vanke plunged 3.8 percent to 9.14 yuan, while rival Poly Real Estate Group Co. slid 5 percent to 13.75 yuan.

Home prices in 70 cities climbed 8.6 percent from a year earlier, China Information News, the statistics bureau’s newspaper, reported today. That’s slower than the 9.1 percent increase in September and the 8.9 percent median estimate in a Bloomberg News survey of six economists.

Policy Bias

“House price inflation is moving in the right direction over the last few months, but officials will likely want to see more progress, suggesting that the policy bias remains in favor of more rate hikes,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada, said in an e-mail. China has tightened measures on home purchases this year, suspending mortgages for third-home purchases and pledging to speed up trials of property taxes nationwide. It also raised interest rates in October for the first time in three years on concerns of inflation and relentless growth in asset prices.

Fund Flows

China’s stock market may benefit from quantitative easing as excess liquidity flows into equities, Michael Kurtz, head of Asian strategy at Macquarie Bank Ltd., said in an interview with Bloomberg Television today. While the U.S. government’s debt- buying plan “creates challenges for China,” some of this liquidity may be diverted to the A-share market, he said. The Shanghai Composite has climbed 31 percent from its July 5 low as fund flows to emerging markets surged. Stocks in the gauge are valued at 17.7 times estimated earnings, less than half the multiple of 43 when the market peaked in 2007.

Morgan Stanley recommended “cheap” stocks in China and South Korea advised reducing holdings in Southeast Asia after rallies drove indexes in Indonesia, the Philippines and Malaysia to record highs. Chinese stock investors opened 449,905 accounts during the week ended Nov. 5, the most in a year, according to data posted on the website of the China Securities Depository and Clearing Corp. today. Inflows into emerging-market stock funds have surpassed $60 billion and exceeded $46 billion in bonds, with both poised for their best year since Cambridge, Massachusetts-based EPFR Global started tracking them in 1995.

‘Hot Money’

Central Bank adviser Xia Bin said the nation should tax inflows of short-term capital and send a clear signal that speculators bringing “hot money” into the country will be punished. China doesn’t welcome foreign speculators in the nation’s commercial real estate market, he said. The State Administration of Foreign Exchange will tighten management of banks’ foreign-debt quotas and introduce new rules on their currency provisioning, the regulator said in a statement yesterday. The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.

Policy makers from Asia to South America have warned that the Federal Reserve’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. “Fund inflows due to the quantitative easing by the U.S. are compounding the problems,” said Wang.

Drugmaker stocks rose after the government announced plans to speed up a restructuring of the pharmaceuticals industry. Harbin Pharmaceutical Group Co. jumped 4.7 percent to 26.07. China will push for mergers and acquisitions in the industry, the Ministry of Industry and Information Technology said in a statement on its website yesterday.

--Chua Kong Ho. Editors: Allen Wan, Richard Frost

Ok I skimmed through this so my reply to this may be incomplete or misinformed, I think I can agree with Batman's rationale from a sentimental standpoint and from a global equity perspective. Tightening of policy can be a good thing to curb speculation/bubble tendencies and sentiment wise can be bullish.

I think I can also see the articles argument from a domestic equity stand point. Something possibly along the lines with inflation expectations may lead to another rate increase driving capital flows to the fixed income arena away from equities… The article though tried to highlight that the rate increase will hurt the financial sectors bottom line due to decreased demand… not sure i buy into that as much but hey to each his own argument… in this business we make money despite being wrong or right

Snapman wrote:

Ok I skimmed through this so my reply to this may be incomplete or misinformed, I think I can agree with Batman's rationale from a sentimental standpoint and from a global equity perspective. Tightening of policy can be a good thing to curb speculation/bubble tendencies and sentiment wise can be bullish.

I think I can also see the articles argument from a domestic equity stand point. Something possibly along the lines with inflation expectations may lead to another rate increase driving capital flows to the fixed income arena away from equities… The article though tried to highlight that the rate increase will hurt the financial sectors bottom line due to decreased demand… not sure i buy into that as much but hey to each his own argument… in this business we make money despite being wrong or right

Well put sir....You extracted much more from this article than I retained.