China stocks fall on regulatory curb concern

Hong Kong - China’s shares tumbled the most since July on concern the government will take steps to cool speculative activity in the nation’s financial markets.

The Shanghai Composite Index fell 1.2% this week as it added 0.1% at Friday’s close. Property shares led losses during the week as large Chinese cities are said to consider curbs to tame prices, including restrictions on mortgages and loans to developers. The Hang Seng Index advanced 0.5% at 08:45 as China Mengniu Dairy surged for a second day.

Shanghai, Beijing and Tianjin are all contemplating measures to cool surging home prices, according to people familiar with the matter, while 10-year government bonds headed for a weekly drop on signs policy makers are looking to curb leverage in the debt market.

Increasing bets that the Federal Reserve will raise interest rates this year are also pressuring the yuan, which fell this week against the dollar. A speech by Fed Chair Janet Yellen on Friday will be closely watched.

“The market is running into resistance as easing expectations fade,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. “Investors are waiting for Janet Yellen’s speech amid corrections in overseas markets.”

A gauge of property shares on the mainland fell 4.6% this week, the most since March. Gemdale rose 1.3% on Friday, paring its five-day loss to 8.7%. Industrial stocks also retreated from August 19, with China Railway Construction down 5.4%.

The Chinese central bank’s move to use 14-day reverse-repurchase operations - rather than just a one-week tool - in its open-market operations fueled speculation that policy makers are trying to curb leverage in the financial system.

The move prompted a drop in sovereign bonds, with the 10-year yield rising from a decade-low, and strategists including Frances Cheung at Societe Generale to say that the PBOC’s actions suggest that there are unlikely to be near-term cuts to interest rates or bank reserve requirements.

In Hong Kong, China Mengniu Dairy rose 5.5%, taking its two-day gain to 18%, the most since 2009. The move came after JP Morgan and Credit Suisse upgraded the stock.

Li & Fung fell 3.6% on Friday, it biggest slide in more than three weeks. The world’s largest supplier of clothes and toys to retailers reported a 14% drop in first-half core operating profit on Thursday.