China’s Stocks Drop for First Time in 4 Days Before Inflation Data Release

China’s stocks fell, halting the benchmark index’s biggest three-day gain since 2010, on concern inflation will hamper the government’s ability to ease monetary policies to spur growth.

China Vanke Co. (000002) paced declines by developers after Credit Suisse Group AG said the central bank may raise interest rates this year as consumer-price gains remain above the government’s “comfort zone.” Huaneng Power International Inc. (600011) dropped among electricity producers after the Xinhua News Agency said the nation’s power consumption growth may decelerate in 2012. The government will release December inflation data tomorrow.

“We aren’t likely to see an immediate and aggressive relaxation of monetary policies given inflation is still at a relatively high level,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “The doubt over the magnitude and timing of policy easing will limit room for the rebound we’ve seen over the past few days.”

The Shanghai Composite Index (SHCOMP) fell 9.7 points, or 0.4 percent, to 2,276.05 at the close, ending a three-day, 6.4 percent rally. The CSI 300 Index declined 0.5 percent to 2,435.61. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, rose 1.1 percent yesterday in New York.

The Shanghai Composite advanced 3.9 percent this year through yesterday on optimism the government will ease monetary policies to boost economic growth. A central bank report released over the weekend showed new lending and money supply exceeded estimates in December. Import growth fell to a two-year low in December, the customs office said yesterday.

The rebound lifted stocks on the Shanghai gauge to 9.3 times estimated earnings from a record low of 8.9 times reached on Jan. 6, according to weekly data compiled by Bloomberg. The index fell 22 percent last year after the central bank raised interest rates and reserve requirement ratios.

Savers have had negative returns on their bank deposits for the longest stretch of months in 16 years, leaving Premier Wen Jiabao less scope to cut interest rates to spur growth. Inflation may have exceeded the one-year deposit rate for the 23rd straight month in December, when consumer prices probably rose 4 percent, according to the median forecast of economists in a Bloomberg survey. The data is due for release tomorrow.

A gauge tracking property developers dropped 0.9 percent, following a two-day, 6.8 percent surge. Vanke, the nation’s biggest listed property developer, fell 0.9 percent to 7.46 yuan. Poly Real Estate Group Co. (600048), the second largest, lost 0.4 percent to 10.31 yuan. China Merchants Property Development Co. (000024) retreated 0.5 percent to 18.34 yuan.

Property prices in Shenzhen will likely fall to levels seen in April 2009 with government curbs in place, the Securities Times reported, citing Centaline Property Consultants. Shenzhen’s new home transactions by area fell to an 11-year low last year, according to the newspaper.

China may raise both lending and deposit rates by 25 basis points, or 0.25 percentage point, this year, Robert Prior- Wandesforde and Dong Tao, analysts at Credit Suisse, wrote in a report.

“Although economic activity is likely to soften further in 2012, inflation will probably remain above the government’s comfort zone, making a policy rate increase far more likely than a rate cut in our view,” the analysts wrote.

China’s average wholesale vegetable price in the country rose 7.5 percent in the week ended Jan. 8 from the previous week, the Ministry of Commerce said yesterday. Inflation rate was 4.2 percent in November, exceeding the government’s annual target of 4 percent for 2011.

Huaneng Power, the listed unit of China’s largest power group, fell 1.8 percent to 5.39 yuan. GD Power Development Co. (600795), the largest electricity producer in northeastern China, lost 1.8 percent to 2.76 yuan. Huadian Power International Corp., the listed unit of China’s fourth-largest power producer, slid 1.2 percent to 3.31 yuan.

China’s power-use growth may slow to 8.5 percent this year, Xinhua reported, citing Yu Yanshan, deputy director of the State Electricity Regulatory Commission. Electricity consumption slowed to 11.7 percent last year from 14.5 percent in 2010, it said.

CLSA Asia-Pacific Markets has turned cautious on China’s stocks because of “downside risk” to the economy from slumping property prices. Earnings growth may slow to 5 percent compared with the consensus estimate of 19 percent and the central bank may undertake “reactive” policy loosening rather than “proactive, Manop Sangiambut, CLSA’s head of China A-share research, said in a report dated yesterday.

Monetary Policy

The central bank may reduce reserve ratios in the first half of the year and any cut in interest rates would happen in the second half, Helen Zhu, a strategist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today.

Angang Steel Co. (000898) added 0.9 percent to 4.72 yuan. Executives plan to buy shares in the company over the next six months, the steelmaker said in a statement yesterday.

The China Securities Regulatory Commission started an investor-protection bureau, which will draft and review laws to protect investors, Xinhua reported yesterday, citing a press release from the securities regulator.

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

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at [email protected]

To contact the editor responsible for this story: Darren Boey at [email protected]