Chinese stocks listed on the mainland and in Hong Kong may decline
after the central bank raised interest rates to cool an investment boom in the
world's fastest-growing major economy.
Commodity-related stocks such as Jiangxi Copper Co. and Maanshan Iron &
Steel Co. may drop on concern a slowdown in the economy will lower demand for
their products.
The increase "is likely to sap demand for equities," said Zhang Ling, who
manages the equivalent of $2.4 billion with ICBC Credit Suisse Asset Management
Co. in Beijing. "Public companies will have higher borrowing costs and
eventually have their earnings hurt."
The People's Bank of China raised the one-year lending rate 27 basis points
to 6.12 percent, according to an Aug. 18 statement. The one-year deposit rate
was increased by the same amount to 2.52 percent. Seven of 22 economists
surveyed by Bloomberg News on Aug. 16 forecast China would raise the lending
rate by Sept. 30.
Rate increases on April 27 and October 2004 failed to slow the economy, which
expanded 11.3 percent in the second quarter, the most in more than a decade.
Failure to rein in lending and investment could leave China with too many
factories, falling profits and rising bad loans, the World Bank says.
Insurers such as Ping An Insurance (Group) Co. and China Life Insurance Co.
may advance on speculation returns from fixed-income investments will increase.
New Cycle?
China's Shenzhen Composite Index, which tracks yuan-denominated A shares and
foreign-currency B shares, is Asia's best-performing stock benchmark this year,
with a 44 percent gain in dollar terms. Its Shanghai counterpart is second best,
having risen 39 percent.
The Hang Seng China Enterprises Index, which tracks the so- called H shares
of 38 mainland companies listed in Hong Kong, is No. 4 in Asia, with a 31
percent advance.
There may be selling "across the board" after last week's rate rise, said Lan
Xue, head of China research at Citigroup Inc. in Hong Kong. Any dent in
sentiment may be temporary because long- term economic growth in China is still
intact, she said.
The Shanghai Composite Index, which measures the bigger of China's two
markets, slid 2.8 percent in the week after the 2004 increase and rose 1.7
percent following the April hike. The H- share index added 0.6 percent after
2004's rise and climbed 4.5 percent after the April increase.
"The US interest-rate cycle is more or less over, but now we're facing a new
cycle in China," said Winson Fong, who manages $2 billion at SG Asset Management
in Singapore. Property will be among "the worst hit. Mortgage rates will go
higher."
Commodity Stocks Drop
Chinese shares trading in the U.S. such as Yanzhou Coal Mining Co. and
PetroChina Co. declined on concern that rising borrowing costs may curb the
nation's demand for raw materials.
Yanzhou Coal, a unit of China's fourth-biggest coal producer, dropped $1.18,
or 3.2 percent, to $36.12. PetroChina, the nation's biggest oil and gas company,
fell 38 cents, or 0.3 percent, to $113.30.
Shares of Jiangxi Copper, China's largest producer of the metal, have more
than doubled this year both in Hong Kong and in Shanghai. The stock dropped 5.2
percent in Hong Kong the day after the April rate increase.
Maanshan Iron and Angang New Steel Co., China's largest steelmakers listed in
Hong Kong, may slide on concern steel prices on the mainland may decline.
Maanshan shares fell 2.7 percent the day after the April rate increase, while
Angang Steel's lost 2.2 percent.
Insurers
Ping An's Hong Kong shares rose 77 percent this year, and posted gains of 2.1
percent in the week after the 2004 rate increase and 7.4 percent after the April
move.
Gains from investments in stocks, bonds and bank deposits helped Ping An,
China's second-biggest life insurer, post an 83 percent increase in first-half
earnings.
Shares of China Life, the nation's biggest insurer, gained 3 percent the week
after the 2004 rate increase and 4.8 percent after the April move. The stock on
Aug. 18 added $1.16, or 1.6 percent, to $71.95 in the U.S.
China Life reported April 18 its 2005 profit rose 30 percent from a year
earlier to 9.31 billion yuan ($1.16 billion) as premiums and investment returns
increased.
"For insurance companies, their investment portfolio will benefit because the
bulk of their investments are in fixed deposits," said Winson Fong, who manages
$2 billion at SG Asset Management in Singapore. "So, higher interest rates will
be positive for them in the short term."
