Chinese Stocks Not at Bottom: ICBC Credit SuisseChina’s benchmark stock index may extend declines after erasing all of its gains for 2011 yesterday as higher interest rates slow economic growth without cooling inflation, ICBC Credit Suisse Asset Management Co. said.
The Shanghai Composite Index slumped 2.9 percent yesterday, the most since Jan. 17, after a preliminary reading of a purchasing managers’ index showed China’s manufacturing may expand at a slower pace this month. The guage has tumbled 9.3 percent from a five-month high on April 18 amid concern government tightening measures will slow earnings growth.
“We remain cautious in the near term and we haven’t seen the bottom yet,” said Hao Kang, a Beijing-based fund manager at ICBC Credit Suisse Asset, which oversees $8.7 billion. “The economy’s definitely slowing but we’ve yet to see inflation easing. Although a short-term bounce is possible, it’s not the time for bottom fishing. We need to see a clearer policy signal.”
The government 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 a 5.3 percent increase. China should get used to an inflation rate between 5 percent and 10 percent for an extended period of time, the official Xinhua News Agency reported May 22, citing Wang Jian, secretary general of the National Development and Reform Commission’s China Society of Macroeconomics.
The Shanghai index has fallen 1.2 percent this year, sending valuations of companies traded on the measure to 15.5 times reported earnings, a four-month low, compared with ratios of 9.5 for Brazil, 8 for Russia and 16 for India. The American Stock Exchange China Index dropped 2.9 percent to 246.49 yesterday, the most since May 3.
‘Hard Landing’ Chinese Premier Wen Jiabao is aiming to tame inflation in the world’s fastest-growing major economy while sustaining expansion to create jobs and maintain social stability. The risk of a “hard landing” in China is rising as property sales weaken and construction slows due to weaker demand, JPMorgan Chase & Co. said on May 17. China’s economy grew 9.7 percent in the three months to March, slowing from 9.8 percent the previous quarter.
China’s stocks may “break out” of their trading range as growth in the world’s second-largest economy slows, reducing the need for further policy tightening, according to Citigroup Inc.
“More evidence suggests that the Chinese economy is moderating,” Citigroup analysts led by Minggao Shen wrote in a report May 19. “However, a hard landing is still unlikely barring the possibility of double-dips in the developed world.”
Price To Book China’s stocks haven’t reached a bottom as the market’s price-to-book value trades higher than average and valuation gaps between different industries are still high, according to Hao Hong, a strategist at China International Capital Corp.
The price-to-book ratio, a more reliable valuation indicator than the price-to-earnings ratio, is still about 10 percent higher than its average over the past seven years, Hong wrote in a report yesterday. A convergence of price-to-earnings ratios between different industries is a sign for a market bottom, the report said.
The Shanghai Composite is valued at 2.4 times book value, the second-most expensive among the four so-called BRIC nations that include Brazil, Russia and India, according to data compiled by Bloomberg. India is the most expensive with a multiple of 3 times.
“This isn’t the bottom,” CICC’s Hong wrote.
Europe Concern
Chinese stocks declined yesterday amid signs Europe’s debt crisis is worsening. Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialist party suffered its worst defeat in more than 30 years in local elections amid a backlash over austerity measures, Standard & Poor’s said that Italy’s rating was at risk of a downgrade and Fitch Ratings cut Greece by three grades.
The European Union is China’s biggest export market, making up about 20 percent of its overseas shipments.
Chinese equities also declined after HSBC Holdings Plc and Markit Economics said the preliminary manufacturing index was at 51.1, compared with the final reading of 51.8 in April. The reading was the lowest in 10 months, HSBC said. A number above 50 indicates expansion.
--Zhang Shidong. Editors: Richard Frost, Darren Boey
To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net