Most Chinese stocks fall amid prices data as MSCI decision looms

[HONG KONG] Most Chinese stocks fell after inflation data signalled weaker demand and traders weighed whether MSCI Inc. will add mainland securities to its global indexes.

Material and industrial companies led declines, with Aluminum Corp of China Ltd and China Railway Construction Corp slumping at least 2.5 per cent. The consumer-price index rose 1.2 per cent in May, data showed Tuesday, compared with an estimated 1.3 per cent increase, while the producer-price index fell 4.6 per cent, exceeding the forecast for a 4.5 per cent drop.

The Shanghai Composite Index slipped 0.5 per cent to 5,106.37 at 9:50 am, dropping from the highest level since January 2008. Data on Monday showed China's exports in May declined for a third month and imports slumped for a seventh. MSCI will on Tuesday decide in New York whether to add China's locally traded shares in its equity benchmarks.

"A trio of growth engines - exports, consumption and investments is all weak and argues for more aggressive stimulus to jump start the economy," said Neil Lee, a Hong Kong-based analyst at Pedder Street Investment Management Ltd.

"What's heavily on the minds of traders today is also MSCI's decision which is a close call. The market will stay very volatile."

The CSI 300 Index lost 0.1 per cent. Hong Kong's Hang Seng China Enterprises Index climbed 0.1 per cent, while the Hang Seng Index declined 0.1 per cent.

China's consumer prices rose at a slower pace in May and factory-gate deflation extended a record stretch of declines, underscoring tepid demand at home and abroad. The government has switched to stimulus mode with monetary easing and efforts to engineer a clean up of local government debt. The inflation pace is less than half the official 3 per cent target, suggesting the central bank has room to loosen further.

China, through its companies listed in Hong Kong, accounts for more than 25 per cent of the emerging-market benchmark. It's the biggest weighting in the gauge, followed by South Korea's 15 per cent and 13 per cent for Taiwan, data compiled by Bloomberg show. MSCI has kept China's so-called A shares out of its indexes due to limitations on their tradability.

Chinese yuan-denominated stocks, if added, would make up less than 1 per cent of the MSCI benchmark in the initial stage. A full inclusion, which is subject to China's continued relaxation of trading restrictions, would boost China's weighting to 38 per cent, according to MSCI.

The Shanghai Composite is valued at 25 times reported earnings, the most expensive relative to the MSCI All-Country World Index in seven years. The Shenzhen Composite Index trades at a multiple of 75. The MSCI gauge is valued at 14.4 times.

Margin traders increased holdings of shares purchased with borrowed money for a 11th day on Monday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising to a record 1.42 trillion yuan (US$228.8 billion).

Goldin Properties Holdings Ltd slid 1.7 per cent in Hong Kong after the developer received proposals for privatizing or restructuring. The company's major shareholder Pan Sutong hasn't made a decision, according to Chief Financial Officer Kenas Chan, who told a conference call the firm's financial situation is stable, with no bank loans or bonds outstanding.

BLOOMBERG