China's Stocks Decline Most in 2 Weeks on Korean, Interest-Rate Concerns

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 60 points, or 2 percent, to 2,836.75 at 2:11 p.m., the most since Nov. 23. The CSI 300 Index fell 2 percent to 3,162.72, led by healthcare companies.

South Korea commenced a live-firing drill, plans for which prompted North Korean threats of retaliation, as the United Nations Security Council failed to agree on steps to alleviate tension on the peninsula.

Artillery positions on Yeonpyeong Island, which was shelled by the North last month, began the exercise at 2.30 p.m. local time after fog cleared, said a defense ministry official who declined to be named, citing government policy. North Korea and China are communist allies.

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 10 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 Construction Bank Corp. paced declines for lenders, falling 1.7 percent to 4.63 yuan. Kweichow Moutai Co., China’s largest liquor maker by market value, plunged 4.6 percent to 195 yuan.

Rate Outlook

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.

“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.

Drugmakers Fall

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 3.3 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.

China’s stocks are facing “headwinds” from retail investor bullishness, surging volatility and the dollar, according to China International Capital Corp.

Lower expectations for yuan appreciation, based on twelve- month non-deliverable forwards, put “cold water” on the view that currency gains will be used as an inflation-fighting tool, Hao Hong, Beijing-based global equity strategist, wrote in a report today.

Twelve-month NDFs dropped 0.23 percent to 6.5339 per dollar, as of 9:38 a.m. in Hong Kong. That reflects bets the currency will strengthen 1.9 percent in one year, according to data compiled by Bloomberg.

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