China's manufacturing output falls to seven-month low; HSBC-Markit's preliminary PMI fell to 48.3 in February, down from January's final reading of 49.50, both below 50 level separating growth and contraction

BEIJING , February 20, 2014 () – China’s stocks fell from a two-month high as a bigger-than-estimated decline in a manufacturing gauge overshadowed China Petroleum & Chemical Corp.’s plan to open a unit to private investors.

Citic Securities Co. slid 3 percent, dragging down financial companies for the biggest loss among industry groups, after Credit Suisse Group AG downgraded its Hong Kong-listed shares. Sanan Optoelectronics Co. led declines for technology companies with a 4.7 percent slump. Sinopec, as China Petroleum is known, surged 10 percent and PetroChina Co., the largest oil producer, climbed 4.7 percent.

The Shanghai Composite Index dropped 0.2 percent to 2,138.78 at the close. The measure erased a rally of as much as 1.7 percent after a preliminary manufacturing index fell to a seven-month low. HSBC Holdings Plc and Markit Economics’ index, known as the flash PMI, was 48.3 this month, compared with the estimate of 49.5. A number below 50 indicates contraction.

“The PMI data isn’t looking good but I don’t expect it to cause panic in the market,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “Sinopec signals to investors a big step forward for reform of state-owned enterprises and it’s time for big caps to catch up since their performance has been lagging.”

The CSI 300 Index lost 0.9 percent to 2,287.44. The Hang Seng China Enterprises Index retreated 0.8 percent. The Bloomberg China-US Equity Index, the measure of the most-traded U.S.-listed Chinese companies, gained 0.7 percent yesterday.

The Shanghai Composite has rebounded 7.4 percent from its Jan. 20 low as new credit rose to a record last month and investors anticipate policies such as reform of state-owned enterprises at an annual legislative meeting starting next month. Trading volumes were 74 percent above the 30-day average, according to data compiled by Bloomberg.

Brokerages Decline

A sub-index of financial stocks in the CSI 300 slid 1.6 percent today. Citic Securities, China’s biggest listed brokerage, fell 3 percent to 11.15 yuan. Credit Suisse analyst Frances Feng lowered the stock’s recommendation to underperform from neutral, citing lower-than-expected volumes of initial public offerings this year. Haitong Securities Co., the second largest, lost 1.9 percent to 10.11 yuan. GF Securities Co. dropped 1.9 percent to 11.38 yuan.

Technology stocks plunged. Sanan Optoelectronics slid 4.7 percent to 24.12 yuan. Co., the online business of the Chinese Communist Party’s official newspaper, slumped 5 percent to 80.85 yuan.

Economic Reforms

Slumping manufacturing adds to challenges for Communist Party officials grappling with risks to the financial system from trust defaults and soured loans. The preliminary February reading compares with January’s final figure of 49.5.

“Weaker growth should increase the incentive to accelerate SOE reforms,” Barclays Plc economists Jian Chang and Jerry Peng wrote in a note today.

A key task for President Xi Jinping will be overseeing the broadest economic changes since the 1990s, spelled out at the Communist Party Central Committee’s Third Plenum in November. Shifts include loosening the one-child policy, increasing property rights for farmers and encouraging private investment in more industries.

China’s stocks are “dirt cheap” and may rise as the government opens up the market to foreign institutional investors and maintains steady economic growth, Johan Kahm, founder of FMG Funds, said in an interview in Bloomberg’s office in Shanghai. The Shanghai Composite is valued at 8.2 times 12- month projected earnings, compared with the five-year average multiple of 12.3, according to data compiled by Bloomberg.

State Companies

Sinopec, Asia’s biggest oil refiner, surged by the daily limit to 5.17 yuan. The company said in yesterday’s statement that it’s seeking private investors for as much as 30 percent of its oil retail unit. The unit markets and distributes petroleum products and was its biggest contributor to sales in 2012, with 71 percent, according to data compiled by Bloomberg.

Other state-controlled companies also rallied. PetroChina gained 4.7 percent to 7.99 yuan. Sinopec Shanghai Petrochemical Co., China’s largest maker of ethylene, surged 10 percent to 3.85 yuan.

Sinopec shares rose yesterday before the company announcement, spurring concern that details of the announcement were leaked.

“Some investors were probably aware of the news in advance,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co., which oversees about $120 million.

--Zhang Shidong, with assistance from Belinda Cao in New York and Weiyi Lim in Singapore. Editors: Allen Wan, Phani Varahabhotla

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at

To contact the editor responsible for this story: Michael Patterson at

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