China's Stocks Decline on Manufacturing Report

China’s stocks fell the most in almost a week after a preliminary report on manufacturing signaled a sixth month of contraction and officials tightened standards for small companies listed on the ChiNext Board.

SAIC Motor Corp. and Baoshan Iron & Steel Co. led declines for automakers and steelmakers after the so-called Flash PMI was 49.1 in April. China Petroleum & Chemical Corp., Asia’s largest refiner, slid 1.1 percent after China National Radio reported the government may cut gasoline prices next month because a slowing economy has cut demand. Chongqing Department Store Co. rose 1 percent after the company reported an increase in profit.

“The HSBC PMI further proves the economy is heading towards a soft landing, but it should stabilize in the second half of this year,” Zhang Qi, an analyst at Haitong Securities Co., said in a telephone interview. “There’s some correction in stocks as small companies, especially those with bad earnings, are down following the tightening of standards in the ChiNext. (SZ399006)”

The Shanghai index has climbed 8.6 percent this year amid speculation the government will take measures to boost the economy. Stocks in the Shanghai gauge are valued at 10.1 times estimated earnings, compared with a record low of 8.9 times on Jan. 6, according to weekly data compiled by Bloomberg. About 11.6 billion shares changed hands on the Shanghai Composite on April 20, 46 percent higher than the daily average this year. Thirty-day volatility in the gauge was at 19.01.

Manufacturing Index

The preliminary reading of the purchasing managers’ index from HSBC Holdings Plc and Markit Economics today compares with a final 48.3 in March. A number below 50 points to a contraction. The report underscores risks the second-biggest economy may see a deeper slowdown that will restrain world growth as U.S. expansion shows signs of moderating.

“The numbers in recent months have never been that good, but don’t show signs of falling off a cliff either,” Paul Cavey, a Hong Kong-based economist with Macquarie Securities Ltd., said of the HSBC PMI. “Today’s number would suggest continuation of the government’s current policy of slow, cautious loosening.”

SAIC Motor, the biggest automaker, lost 1.8 percent to 15.11 yuan. Baoshan Iron & Steel retreated 0.6 percent to 4.96 yuan.

ChiNext Rules

China may cut gasoline and diesel prices next month, China National Radio reported yesterday, citing Zhang Bin, an analyst at researcher Chem99.com. China Petroleum & Chemical Corp. (600028), known as Sinopec, slid 1.1 percent to 7.27 yuan. PetroChina Co. declined 1 percent to 9.85 yuan. They are the nation’s biggest refiners.

Companies listed on the ChiNext Board will be delisted if they are censured by the exchange three times over a three-year period, the exchange said in an April 20 statement. The companies will also be removed from the board if their share prices close below par values for 20 consecutive days or net asset values are negative for the latest year, according to the statement.

The exchange said it won’t support ChiNext companies seeking to regain listing status by means of reverse takeovers. The rules, which amend a plan announced in February, will come into effect on May 1, according to the statement.

Beijing Originwater Technology Co., which has the biggest weighting on the ChiNext, dropped 3.5 percent to 39 yuan. Lepu Medical Technology Co., the second-largest, lost 3.3 percent to 13.37 yuan.

Don’t Overweight

Chongqing Department Store (600729) Co. rose 1 percent to 29.98 yuan after the company said first quarter net income rose 10.5 percent from a year earlier.

Chinese stocks’ low valuations aren’t sufficient reason to overweight a market where earnings revisions are Asia’s second- worst and economic data are disappointing, according to Citigroup Inc.

“China is cheap,” Citigroup analysts led by Markus Rosgen wrote in a report dated today. “This is necessary, but not enough for an overweight. Plenty of markets in the region and the world are now cheap.”

Chinese stocks are now the second-most overweight market among institutional investors in Asia after Thailand, Rosgen wrote. As institutions have already bought into the market, inflows from retail investors are needed to drive equities higher, he wrote. Yet growing bank deposits signal a lack of enthusiasm by the public to shares, Rosgen wrote.