China Stocks Fall Most in Month on Korea, Inflation Concerns

Dec. 20 （Bloomberg） -- China’s stocks fell the most in a month as tensions in the Korean Peninsula fueled a selloff in risk assets, adding to lingering investor concerns that the government may raise interest rates to tame inflation.

Jiangxi Copper Co. and Aluminum Corp. of China Ltd. dropped more than 3 percent as commodities prices slid and the dollar rose after South Korea said it will proceed with a live-firing drill that has prompted North Korean threats of retaliation. Kangmei Pharmaceutical Co. led a retreat among health-care companies after the Economic Observer said the government may cut medicine prices by 40 percent.

“The tension in the Korean Peninsula may fuel investors’ pessimism approaching the year end,” said Wu Yang, associate director at Guotai Junan Futures Research Institute. “The market always gets hit from these kind of shocks.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slid 69.09 points, or 2.4 percent, to 2,824.65 at 1:06 p.m., the most since Nov. 16. The CSI 300 Index fell 2.5 percent to 3,144.44, as all 10 groups lost more than 2 percent.

The United Nations Security Council failed to agree on steps to ease tensions on the peninsula as an emergency meeting ended last night without agreement as China blocked moves to condemn the North and Russia urged the drills be scrapped.

Live-fire drills “would make it impossible to prevent the situation on the Korean peninsula from exploding,” KCNA cited the Ministry of Foreign Affairs as saying on Dec. 18.

Jiangxi Copper, the biggest copper producer, slid 3.9 percent to 38.88 yuan. Aluminum Corp. Of China dropped 2.8 percent to 10.09 yuan.

Rate Concerns

Copper futures prices fell 0.3 percent in Shanghai. The dollar advanced to $1.3150 per euro as of 11:33 a.m. in Tokyo from $1.3188 in New York on Dec. 17, after reaching $1.3125, the highest level since Dec. 2.

The Shanghai Composite, the worst performer among major Asian benchmarks this year, has fallen 11 percent since reaching an almost seven-month high on Nov. 8, on concern that monetary tightening will curb economic growth. The gauge has lost 14 percent this year.

“People are still worried about further policy tightening such as interest-rate increases,” said Larry Wan, Beijing-based head of investment at Union Life Asset Management Co., which oversees the equivalent of $2.21 billion. “The government hasn’t increased rates yet as had been speculated by the market. It’s like a sword hanging over the market.”

China’s inflation may exceed 5 percent to 6 percent in some months of next year, the People’s Daily reported today, citing Ba Shusong, a researcher at the State Council’s Development Research Center. Inflation may be between 4 percent and 5 percent for the whole of 2011, Ba was cited as saying.

Central Bank Governor Zhou Xiaochuan said the government will take stock moves into consideration when making policies.

Market Reaction

“We are trying our best in making policy decisions to take the stock market reaction into account,” China Central Television reported on Dec. 18, citing Zhou. “But when you only have a limited number of policy tools, you can hardly cover all the bases.”

China increased interest rates in October for the first time since 2007 as inflation reached 4.4 percent on an annual basis, the highest since September 2008. Since then, the central bank has raised reserve requirements for lenders three times in five weeks. The last increase was on Dec. 10.

The National Development and Reform Commission may cut drug prices by an average 40 percent for 658 different items for the fourth time since 2009, the Economic Observer reported today, citing unidentified drug company officials.

A gauge of health-care stocks fell 3.9 percent today, the most among the 10 industry groups of the CSI 300.

Kangmei Pharmaceutical lost 6.2 percent to 20.80 yuan. Beijing Tiantan Biological Products Corp. retreated 3.6 percent to 23.03 yuan while North China Pharmaceutical Co. dropped 4.3 percent to 16.18 yuan.

--Irene Shen, Zhang Shidong. Editors: Allen Wan, Richard Frost