Anthony Tran and Gladys Tang
With Chinese inflation rising at the fastest pace in seven years, commodity stock prices began to fall sharply yesterday amid concerns that Beijing would take measures to seriously slow down the economy.
Investors are increasingly worried that if China – now the world’s largest consumer of many raw materials – slows markedly, the downtrend could trigger a global fall in commodity prices.
“This is an irrational sell-off,” a Shanghai-based commodities specialist cautioned.
“People in China are still eating, still building. It just illustrates how much hot money and gearing was leveraged into the financial markets. I don’t see any decline in use. I see a declining growth rate, perhaps. Not declining use.”
The China H-share index, which tracks 37 mainland companies floated on the Hong Kong exchange, fell 4.7 per cent, closing at a six-month low as investors sold off shares to cut losses. Chongqing Iron, China Resources Power, Yanzhou Coal, Zhenhai Refining and Jiangxi Copper plunged more than 10 per cent.
“Investors from the mainland cashed in by selling the stocks as lending has been tightened in China,” Daiwa Institute of Research head of China research Alex Fan said. “The downside risk is very big since there are too many uncertainties. It’s dangerous to buy now.”
Sean Darby, head of regional strategy for Nomura Asian Equity Research, attributed the fall to the closing out of extremely leveraged carry trade, a method of borrowing cheap US dollars and investing them in emerging market debt, junk bonds and Asian equities.
As interest rate fears have risen, the carry trades have been closed out, affecting the commodities markets, Darby said. He added that there are increasing worries that intermediate and downstream manufacturers are unable to pass on the high prices of raw materials and are beginning to slow their purchases of commodities.
Until now, the focus of the lending curbs has been on the steel, cement, aluminium and real estate industries. However, the People’s Bank of China and China Banking Regulatory Commission have also ordered banks to restrict or ban loans to industries including petrochemicals, non-ferrous metals, machinery and construction materials industries.
Fears of a PBOC interest rate increase in the near term escalated yesterday after China’s statistics bureau said the consumer price index rose 3.8 per cent in April.
“The market fell as investors feared the PBOC would increase the interest rate following the release of the CPI figures,” Kim Eng director Eva Chu said. “For fund managers holding H-share portfolio, they prefer to hold cash as it’s approaching the quarterly review and some clients have asked for redemption.”
Steelmaker Chongqing Iron dived 14.29 per cent yesterday to HK$2.25, China Resources Power shed 14.29 per cent to HK$3.30, Aluminum Corp of China, or Chalco, dropped 5.77 per cent to HK$3.675, while Yanzhou Coal fell 13.89 per cent to HK$6.20.
Jiangxi Copper fell 11.88 per cent to HK$2.225 on news that the State Reserves Bureau has offered to sell a total of 59,000 tonnes of copper, which may soften copper prices.
Despite record high crude oil prices, China’s largest oil producer PetroChina lost 4.26 per cent to HK$3.375. Asia’s largest oil refiner, China Petroleum and Chemical Corp, or Sinopec, fell 3.6 per cent to HK$2.675 while Zhenhai Refining tumbled 14.73 per cent to HK$4.775.
“I believe there will be a short-term rebound in the steel sector, which has an average price-to-earnings ratio of only five times but 7 per cent yield,” Chu said. “It has been badly oversold.”
Source: The Standard