China Stocks Fall to 6-Month Low on Credit Crunch, Manufacturing

China's stocks fell to the lowest level in six months after benchmark money-market rates climbed to a record and a private report showed manufacturing shrank at a faster pace this month.

Ping An Bank Co. and China Minsheng Banking Corp. dropped more than 4 percent as the repurchase rate, a measure of interbank funding availability, jumped to the highest level since at least 2006. Poly Real Estate Group Co. dragged property developers to the biggest loss among industry groups. Metal and energy companies slumped on concern about the economy, with Jiangxi Copper Co. sliding to the lowest level since March 2009 and Yanzhou Coal Mining Co. plunging 7 percent.

The Shanghai Composite Index (SHCOMP) lost 2.8 percent to 2,084.02 at the close. The CSI 300 Index dropped 3.3 percent to 2,321.47. The Hang Seng China Enterprises Index (HSCEI) fell 3.2 percent. The Bloomberg China-US Equity Index plunged 2.5 percent yesterday after Federal Reserve Chairman Ben S. Bernanke said the central bank may reduce bond purchases later this year.

"Stocks can't take a turn for the better after Bernanke's speech yesterday," said Cao Xuefeng, an analyst at Huaxi Securities Co. in Chengdu. "The HSBC PMI isn't helping either, indicating the economy isn't showing signs of recovery. There's also nervousness about a lack of liquidity in the market."

The Shanghai Composite has slumped 14 percent from this year's high on Feb. 6 amid concerns the government may introduce more property curbs and is considering resuming approvals of initial public offerings. The index's trading volumes were 22 percent below the 30-day moving average today, while 30-day volatility was at 16.9, compared with this year's low of 13.7 set on June 7, according to data compiled by Bloomberg.

Manufacturing Slowdown

The preliminary reading of 48.3 for a Purchasing Managers' Index released by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate in a Bloomberg News survey of 15 economists.

Gauges of material and energy stocks in the CSI 300 dropped 3.6 percent and 3.3 percent respectively. Jiangxi Copper, the biggest producer of the metal, slid 3.9 percent to 17.77 yuan. Yanzhou Coal plunged 7 percent to 11.62 yuan. Baoshan Iron & Steel Co., the listed unit of China's second-biggest steelmaker, declined 2.6 percent to 4.17 yuan.

The manufacturing report builds on evidence that growth is slowing for a second quarter after exports, industrial output and bank lending trailed estimates for May. The weakness, along with a money-market cash crunch, will further test how far Premier Li Keqiang is willing to go in sacrificing short-term expansion for more sustainable long-term growth.

Money Rates

The seven-day repurchase rate rose 2.70 percentage points to 10.77 percent in Shanghai, according to a daily fixing announced by the National Interbank Funding Center. That was the highest in data going back to March 2003. The one-day rate rose by an unprecedented 527 basis points to an all-time high of 12.85 percent, a separate fixing showed. An intra-day gauge of the one-day rate touched a record 30 percent.

The credit crunch will hit banks, property and builders, said Ben Kwong, chief operating officer at Hong Kong-based KGI Asia Ltd. Tighter liquidity is "reflecting the government's effort to clean up outstanding financial issues. This is the the intention of the People's Bank of China to put some pressure on Chinese banks to clean up their problems," he said.

PBOC and other regulators could be taking the opportunity of tight funding to "punish" some small banks which previously took advantage of stable interbank rates to finance higher-yield bond purchases, Bank of America Corp. economists led by Ting Lu wrote in a report, saying the tight liquidity could extend to early July.

Tight Liquidity

A gauge of financial companies in the CSI 300 including banks and developers slumped 3.5 percent to the lowest level since December. China Minsheng Banking declined 4.7 percent to 9.29 yuan, the biggest drop since March 28. Ping An Bank fell 6.2 percent to 11.18 yuan. Poly Real Estate, the second-biggest developer, slid 3 percent to 10.61 yuan. Gemdale Corp. (600383) fell 2.8 percent to 6.54 yuan.

Authorities will boost credit support for industries the government has defined as strategic and those that are labor-intensive, the State Council, or Cabinet, said in Beijing yesterday after a meeting led by Premier Li. The nation must more firmly guard against financial risks, it said.

"These messages reinforce our view that policy and liquidity will remain tight," Zhang Zhiwei, economist at Nomura Holdings Inc., wrote in a note today. "Industries that face overcapacity problems will likely go through a tough restructuring in the second half and we expect these industries to experience corporate defaults."

-- With assistance from Belinda Cao in New York. Editors: Allen Wan, Richard Frost