SHANGHAI - Most stocks on the Chinese mainland fell, driving the benchmark index to its biggest monthly loss since May, as smaller companies slid on speculation that tighter credit will curb earnings growth and US consumer confidence declined.

"The stock market hasn't shown signs of bottoming out and may continue to head downward for the short term," said Yan Ji, investment director at HSBC Jintrust Fund Management Co, which manages $1.6 billion.

"Investors should be cautious, given the central bank's determination to tighten monetary policy to fight inflation."

The benchmark Shanghai Composite Index rose less than 0.1 percent to 2567.34, paring the month's drop to 5 percent. About seven stocks fell for every five that rose on the gauge. The CSI 300 Index gained 0.2 percent to 2846.78.

The Shanghai gauge has dropped 8.6 percent this year as the central bank raised interest rates five times and ordered lenders to set aside more cash as deposit reserves 12 times since the start of 2010 to contain inflation.

The index is valued at 11.8 times estimated earnings, compared with a record low of 11.6 times set on Aug 22, according to daily data compiled by Bloomberg.

The China Federation of Logistics and Purchasing is scheduled to release a manufacturing index for August on Thursday.

The gauge is expected to rise to 51 from 50.7 a month earlier, according to a Bloomberg survey. A reading above 50 indicates an expansion.

The ChiNext index of startup companies slid for a second day after the central bank ordered lenders to set aside more reserves against margin deposits, boosting speculation liquidity will tighten.

The ChiNext index lost 1.4 percent while the index for Shenzhen small- and medium-sized enterprises fell 0.6 percent.

China Business News quoted Gu Shengzu, a vice-chairman at the National People Congress's internal and judicial affairs committee, as saying only about 10 percent of small- and medium-sized companies are able to get loans from the standard banking system. These companies generate about 60 percent of China's GDP, according to BNP Paribas SA.

A gauge of technology companies retreated 0.6 percent, the most among the 10 industry groups in the CSI 300.

The healthcare measure slipped 0.2 percent. Shanghai Kaibao Pharmaceutical dropped 2.9 percent to 27.98 yuan ($4.39). Shenzhen Glory Medical Co, a maker of medical equipment, fell 2.3 percent to 31.40 yuan. Hangzhou Silan Microelectronics slid 1.4 percent to 15.30 yuan.

Baoshan Steel, the listed unit of China's second-biggest steel company, fell 0.8 percent to 5.29 yuan. Its first-half profit dropped 37 percent because of slowing demand from automakers and rising prices of iron ore and coal.

Listed companies conclude reporting interim earnings on Wednesday. Shanghai Composite Index companies reported an average 24 percent increase in first-half profit, slowing from a gain of 37 percent last year, according to data compiled by Bloomberg.

They beat analysts' estimates by 3.4 percent on average.

China's inflation rate may slow to 6 percent in August as prices have peaked, according to Shenyin & Wanguo Securities Co. Price increases for pork eased in August, Li Huiyong and Meng Xiangjuan, analysts at the brokerage, wrote in a report on Wednesday.

Consumer prices rose 6.5 percent in July, the fastest pace in three years. The August figure is scheduled for release on Sept 9.

Bloomberg News

(China Daily 09/01/2011 page17)