China's Stocks Slump to 10-Week Low on Earnings Concern

China’s stocks fell, dragging the benchmark index to its lowest level in more than 10 weeks, on concern the slowing economy is spurring earnings shortfalls.

Sany Heavy Industry Co. (600031) and gold producer Zijin Mining Group Co. retreated at least 2.6 percent after net income trailed estimates. Sinovel Wind Group Co., the country’s biggest maker of wind turbines, dropped for a sixth day after the Shanghai Securities News reported the government is slowing growth in new wind power projects. Poly Real Estate Group Co. led a gauge of developers to its biggest gain in almost two weeks on speculation the government may relax some property restrictions as the economy decelerates.

“It looks like the slump in economic and earnings growth exceeds investors’ expectations,” said Wang Zheng, Shanghai- based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “The market may need to correct until the end of the first half.”

The Shanghai Composite Index (SHCOMP) dropped 32.72 points, or 1.4 percent, to 2,252.16 at the close, the lowest since Jan. 16. The CSI 300 Index (SHSZ300) declined 1.3 percent to 2,443.12. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, retreated 2 percent in New York yesterday. China’s markets will be closed from April 2 to April 4 for public holidays.

The Shanghai Composite has dropped 8.5 percent from this year’s high on March 2 on concern the world’s second-biggest economy is stalling as the government’s property curbs and tight monetary policies reduce profits. The index fell the most in four months yesterday after Societe Generale SA said Chinese corporate profits won’t grow at all this year. The gauge is still up 2.4 percent since Dec. 31 and is poised for the biggest quarterly gain in a year.

Analysts Estimates

Five-hundred and five companies in the Shanghai Composite have released annual earnings, posting average profit growth of 17 percent, which trails analyst estimates by 3.6 percent, according to data compiled by Bloomberg. That compared with an increase of 38 percent in the previous year.

Sany Heavy, the biggest Chinese machinery maker, fell 4.1 percent to 12.32 yuan. Net income rose 54 percent to 8.65 billion yuan ($1.4 billion) last year, compared with the 9 billion yuan average of 16 analyst estimates compiled by Bloomberg. The company had forecast a 50 percent to 60 percent increase in profit.

Zijin Mining, China’s largest gold producer, lost 2.6 percent to 4.10 yuan. Net income climbed 18 percent to 5.71 billion yuan. The company forecast a profit of 5.8 billion yuan for 2011 on Feb. 3.

Further Declines

Sinovel Wind lost 1.4 percent to 15.05 yuan, capping a six- day, 10 percent decline. Xinjiang Goldwind Science & Technology Co. (002202), the country’s second-biggest maker of wind turbines, slid 2.4 percent to 7.45 yuan. The National Energy Administration told local governments not to “arrange” new wind power projects in areas where more than 20 percent of wind farm output is lost because of limited grid capacity, Shanghai Securities News reported, citing a notice.

Chinese equities will probably extend their retreat unless there is “significant” easing of monetary policy, according to Alan Lam, a Hong Kong-based analyst at Bank Julius Baer & Co., which has about $286 billion in client assets worldwide.

“In the coming three months, the rally has ended,” Lam said by phone yesterday. “The economic slowdown will continue for a while and there are overexpectations on policy. It’s a fact that the economic slowdown in China is negative on profitability.”

The Shanghai Composite was the worst performer among the world’s 10 biggest markets in 2010 and 2011, tumbling a combined 33 percent, as the central bank increased interest rates and lenders’ reserve-requirement ratios to tame inflation.

Developers Gain

Slow economic recovery will prompt the government to loosen monetary policy, according to Morgan Stanley, which increased its estimate for China’s 2012 economic growth to 9 percent from 8.4 percent.

Morgan Stanley expects measures including at least one cut of 25 basis points in the benchmark lending rate, further bank reserve ratio cuts and the resumption of infrastructure investment projects, according to an e-mailed report by analysts led by Helen Qiao.

A measure of property stocks in the Shanghai Composite added 0.7 percent, its biggest gain since March 16. Poly Real Estate, China’s second-largest developer by market value, climbed 2.4 percent to 10.80 yuan. Gemdale Corp. (600383), the four biggest, gained 4 percent to 5.79 yuan.

“The country’s economic growth is slowing down, so investors speculated that the government may not maintain an absolute tightening over the market,” said Dai Fang, a Shanghai-based property analyst at Zheshang Securities Co.

Thirty-day volatility on the Shanghai Composite was at 17.4 today, its highest since March 2. About 8.4 billion shares changed hands in the gauge yesterday, or 5.6 percent lower than the daily average this year.