China's Stocks Decline on Concern Slowdown Will Reduce Earnings

China’s stocks fell, paring this week’s gains, on concern slowing Chinese economic growth will curb earnings and before Greece’s weekend elections that may determine if the country stays in the euro bloc.

China Vanke Co. and Poly Real Estate Group Co. dropped more than 2 percent on concern this week’s rally for developers was excessive relative to the profit outlook. Inner Mongolia Yili Industrial Group Co. (600887), the biggest dairy producer by sales, tumbled 10 percent as the company said it found “abnormal” levels of mercury in its baby formula. Jiangxi Copper Co. (600362) paced gains among commodity producers as metal and oil prices rose.

“Sentiment is cautious and investors are waiting to see what measures policy makers will respond with to deal with the debt crisis,” Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co., said by phone. “China’s economy is still in the stage of slowing down and there’s no reason for over-optimism until data confirm a rebound.”

The Shanghai Composite Index (SHCOMP) dropped 6.33 points, or 0.3 percent, to 2,289.62 as of 1:42 p.m. local time, erasing a gain of as much as 0.8 percent. The decline trimmed this week’s advance to 0.3 percent. The CSI 300 Index (SHSZ300) lost 0.5 percent to 2,546.83. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, slid 0.5 percent in New York yesterday.

Concerns that a growth slowdown is deepening and Greece will leave the euro area have dragged the Shanghai index down 7 percent from this year’s high set on March 2. Stocks in the measure are valued at 9.98 times estimated earnings, compared with the five-year average of 17.8, weekly data compiled by Bloomberg.

Earnings Forecast Cut

A measure tracking developers on the Shanghai Composite dropped 2.2 percent today, paring this week’s gain to 2.5 percent. Developers had jumped after the central bank cut interest rates for the first time since 2008 last week.

Vanke, the nation’s biggest listed property developer, fell 2.2 percent to 9.08 yuan. Poly Real Estate, the second largest, slid 4.1 percent to 14.11 yuan. China Merchants Property Development Co. (000024) lost 2.8 percent to 25.24 yuan.

Credit Suisse Group AG (CSGN) forecast 7.7 percent earnings growth for Chinese companies this year and 3.6 percent growth in 2013, cutting its estimates by 3.1 percent and 3.7 percent respectively because of slowing economic growth, according to a report from analysts Peggy Chan and Vincent Chan.

Credit Suisse also cut its outlook for China’s economic growth this year to 7.7 percent from 8 percent yesterday, while Deutsche Bank AG lowered its forecast to 7.9 percent from 8.2 percent.

Greek Election

Thirty-day volatility in the Shanghai Composite was at 15.41 today, compared with this year’s average of 18.53. About 7.2 billion shares changed hands in the gauge yesterday, 18 percent lower than the daily average this year.

Greece will hold general elections on June 17, which may determine if the nation upholds austerity conditions attached to international aid, and could lead to the first ouster from the euro area. Almost 10 million Greeks will vote for the second time in six weeks after a May 6 ballot failed to yield a government.

Europe is China’s biggest export market, making up about 18 percent of the nation’s overseas sales, according to Shenyin & Wanguo Securities Co.

China can further cut its reserve requirement ratio as M2 growth is “relatively slow” this year, according to a report by researchers at the Chinese Academy of Social Sciences published in the People’s Daily.

Yili Tumbles

Yili tumbled by the 10 percent daily limit to 21.85 yuan after saying it recalled some of its products. Mercury can damage the central nervous system and the lungs or cause birth defects, with children especially vulnerable.

Henan Shuanghui Investment & Development Co. (000895), the publicly traded unit of China’s biggest food company, lost 2.3 percent to 61.21 yuan. Zhengzhou Sanquan Foods Co., the nation’s biggest maker of frozen food, slipped 0.8 percent to 25.75 yuan.

Stocks rose earlier on optimism global policy makers will introduce measures to combat Europe’s sovereign debt crisis. Monetary policy makers from the U.K. to Japan and Canada stepped up warnings about the threat to world financial markets should Europe fail to contain the crisis. Bank of England Governor Mervyn King said the central bank will activate a sterling liquidity facility to aid banks, and plans to have a form of credit easing operating to boost lending as the case for looser policy “is growing.”

U.S.-Traded Chinese Stocks

Jiangxi Copper, China’s biggest producer of the metal, gained 0.3 percent to 24.76 yuan. Zhuzhou Smelter Group Co., the nation’s biggest producer of refined zinc, climbed 0.6 percent to 10.92 yuan. Copper advanced 0.8 percent and aluminum rose 0.5 percent. Oil rallied 0.9 percent in New York.

Chinese Internet stocks fell in New York, led by Youku Inc. (YOKU)’s first decline in two weeks, as Credit Suisse Group AG and Deutsche Bank AG reduced their growth forecast for Asia’s largest economy. The iShares FTSE China 25 Index Fund (FXI), the biggest U.S.-listed China exchange-traded fund, rose 0.2 percent to $33.75 yesterday.