China Stocks Fall on Concern Rally to Three-Month High Overvalues Earnings

China’s stocks fell for the first time in eight days as some investors speculated the benchmark index’s rally to a three-month high excessive relative to earnings prospects.

China Oilfield Services Ltd. (2883) dropped 1.7 percent after oil prices sank for a second day. Suzhou Anjie Technology Co., which supplies devices to Apple Inc., slid 3.5 percent, leading a gauge of small companies down from the highest level since Dec. 2. China Construction Bank Corp. (939) gained 0.6 percent after the China Securities Journal said regulators had allowed banks to continue lending to local governments for some projects.

The Shanghai Composite Index (SHCOMP) lost 10.49 points, or 0.4 percent, to 2,436.57 as of 1:11 p.m. local time, set to snap a seven-day, 3.8 percent gain. The gauge closed yesterday at its highest level since Nov. 17. The CSI 300 Index (SHSZ300) slipped 0.4 percent to 2,647.26. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, retreated 0.7 percent yesterday in New York.

“The run-up is a bit fast and the pressure for a correction is increasing,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The market needs a break here and we also need to see coming economic data will be good to justify the rally. Trading will be volatile going forward.”

The 14-day relative strength measure for the Shanghai Composite, measuring how rapidly prices have advanced or dropped during a specified time period, was at 71.1 yesterday. Readings above 70 indicate a price may be poised to fall.

Manufacturing Index

The Shanghai index has advanced 6.3 percent this month, heading for the biggest monthly gain since October 2010, on optimism the central bank will add to a Feb. 18 cut in reserve requirements to halt a decline in economic growth. For the year, the measure has rebounded 11 percent and trades at 10.1 times estimated profit, compared with a record low of 8.9 times on Jan. 6, weekly data compiled by Bloomberg showed.

China’s statistics bureau and logistics federation is scheduled to release a manufacturing index for this month on March 1. The measure may rebound to 50.9, according to the median estimate of 22 economists in a survey by Bloomberg News. It was at 50.5 in January, above the 50 threshold for expansion.

China Oilfield, the drilling unit of the nation’s largest offshore oil producer, slid 1.8 percent to 17.49 yuan, trimming its gain to 21 percent this year. Offshore Oil Engineering Co., a unit of the country’s third-largest oil producer, sank 0.8 percent to 6.12 yuan. PetroChina Co. (601857), the nation’s largest oil company, lost 0.5 percent to 10.50 yuan.

Oil for April delivery in New York fell as much as 0.7 percent to $107.84 a barrel in electronic trading today. Futures retreated 1.1 percent to $108.56 a barrel yesterday, after reaching a nine-month high on Feb. 24.

Small Companies

The Shenzhen Stock Exchange Small and Medium Enterprises Index dropped 1.5 percent today after rising for six days to the highest level since Dec. 2. Suzhou Anjie slumped 3.5 percent to 32.01 yuan after jumping by the 10 percent daily limit yesterday. NavInfo Co., a developer of electronic maps, fell 2.4 percent to 23.62 yuan.

China’s yuan-denominated A shares may decline late next month amid what could be a “sensitive reporting season” for the nation’s companies, according to UBS AG.

The brokerage recommends investors reduce allocations to cyclical industries such as coal and non-ferrous metals, Li Chen, a UBS strategist, wrote in a report dated today. UBS suggests gradually buying stocks of food, beverage, traditional medicine and some retail stocks when markets retreat.

There is “potential downside risk in late March,” the strategist wrote. “We do not support aggressive positioning before there is enough evidence of the economy bottoming out.”

Trailing Estimates

One hundred and twenty-six companies in the Shanghai Composite have reported annual profits since Jan. 1, gaining 18 percent on average and trailing estimates by 5.3 percent, according to data compiled by Bloomberg. That compares with an increase of 38 percent in the previous year.

A measure of financial stocks in the CSI 300 advanced 0.3 percent today, the second-biggest increase among 10 industry groups. Construction Bank, the country’s second-largest bank, added 0.8 percent to 4.93 yuan. Bank of China Ltd. (3988), the third largest, rose 0.7 percent to 3.08 yuan. China Merchants Bank Co. climbed 1 percent to 12.95 yuan.

The China Banking Regulatory Commission has allowed banks to continue lending to local government financing vehicles for land reserves and road construction, the China Securities Journal reported today.

Local government financing vehicles can also continue to borrow for projects that have been more than 60 percent completed, according to the newspaper. The regulator had previously allowed new loans only for building affordable housing units, it said.