Chinese stocks hammered overnight

The Conference Board revised its leading economic index for China to show the smallest gain in five months in April, in a release that contributed to the biggest sell-off in Chinese stocks in more than a month.

The gauge of the economy’s outlook compiled by the New York-based research group rose 0.3 percent, less than the 1.7 percent gain it reported June 15. The Conference Board said in an e-mailed statement that the previous reading contained a calculation error for floor space on which construction began.

Equities slumped in Asia and Europe as the prospect of a slowdown in the fastest-growing major economy fanned concern that the global recovery may weaken. With American consumers boosting their savings rates and European governments moving to cut spending and restrain fiscal deficits, emerging markets in Asia have led the rebound in the past year.

“We do see some moderation in growth in China, and in many ways that’s a welcome development” because the 11.9 percent annual gain in gross domestic product in the first quarter threatened overheating, said Brian Jackson, an emerging-markets strategist in Hong Kong at Royal Bank of Canada. At the same time, investors are concerned at the implications of slowing Chinese growth for the global economy, he said.

Jackson, who previously worked at the U.S. Federal Reserve and U.K. Treasury, predicts Chinese economic growth will slow to an 8 percent pace by year-end. He added that while the Conference Board’s index is dated, as other data have already been released for May, it provides a “useful” composite of indicators for the nation’s economy.

Stocks Drop

The Shanghai Composite Index lost 4.3 percent to 2,427.05 as of 4:25 p.m. local time. The MSCI Asia Pacific index dropped 1.4 percent and the Stoxx Europe 600 Index retreated 1.7 percent. China’s shares were also down as an impending sale of as much as $20.1 billion of Agricultural Bank of China Ltd. stock hurt investor sentiment, said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co.

The Conference Board’s index, published for the first time in May after four years of development, is designed to capture the outlook over the coming six months. It would have signaled China’s growth slowdown in 2008 and the recession of the late 1980s, according to William Adams, resident economist for the Conference Board in Beijing.

“This correction doesn’t affect our outlook for the Chinese economy,” Adams said in a telephone interview. “Growth was not likely to accelerate in China, and in fact, a moderation is possible. This correction also supports the same view.”

Property Market

Adams said at the time of the original release that new construction work, the key factor pushing up the indicator in April, may not continue to grow so quickly.

In the U.S., the Conference Board releases a benchmark gauge of consumer confidence. The reading for June is scheduled for later today, and is projected to fall for the first time since February, according to the median estimate in a Bloomberg News survey of economists.

American households boosted their savings rate to 4 percent last month, the highest level since September, underscoring a preference to rebuild wealth after home values tumbled the most since the 1930s during the recession.

The Commerce Department last week revised its first-quarter U.S. GDP growth estimate to 2.7 percent, from 3 percent previously, reflecting a smaller gain in consumer spending and a bigger trade gap.

Japan Weakens

Government figures today in Japan showed that the world’s second-largest economy is also slowing. Industrial production fell in May for the first time since February, the unemployment rate increased for a third month and household spending declined.

Today’s Conference Board revision for China showed that total floor space started in April dropped 0.1 percent, instead of the 1.3 percent gain originally reported.

China’s regulators have tightened rules for the property market in an effort to stem speculation and avert an asset bubble in the aftermath of a record credit expansion last year.

Premier Wen Jiabao’s government has also set a target to shrink new loans to 7.5 trillion yuan ($1.1 trillion) from 9.59 trillion last year. Officials have boosted requirements for the amount of money banks must hold as reserves, and used bill sales to withdraw cash from the financial system.

China this month committed to ending its fixed exchange rate peg to the dollar, another step that may cause the expansion to ease. The yuan had been held at 6.83 per dollar since July 2008 after a 21 percent gain the three prior years, in an effort to shield exporters from the global crisis.

Yuan Shift

The shift to a more flexible yuan will slow Chinese exports this year, adding to difficulties that include the European debt crisis and rising costs, Yu Jianhua, a Ministry of Commerce director general, told reporters in Toronto three days ago.

“The revision may have echoed existing market concern that China’s growth may slow later this year, though economic fundamentals are so far little affected by the European debt crisis,” said Lu at Industrial Bank.

China remains the world’s fastest growing major economy, and the yuan decision was taken after the government concluded the rebound had “become more solidly based,” according to a June 20 People’s Bank of China statement.

Indicators for May showed that exports climbed 48.5 percent from a year before, helping yield a $19.5 billion trade surplus for the month. Inflation accelerated to an annual 3.1 percent pace in May, surpassing officials’ target for the full year, retail sales gains quickened to 18.7 percent and industrial production jumped 16.5 percent, government reports showed three weeks ago.

Lending Growth

Lending growth also exceeded economists’ estimates for last month. Banks extended 639.4 billion yuan ($94 billion) of new loans in May, compared with the median forecast of 600 billion in a Bloomberg News survey of economists.

The Conference Board’s coincident index for April, which is a measure of current economic activity, was unchanged from the release earlier this month. The coincident gauge increased 1.2 percent following a 0.4 percent increase in March.

The error for the leading index was “unfortunate where the group has tried to be as transparent as possible,” Adams said. The measure is based on data and surveys from the People’s Bank of China and the statistics bureau.