Dec. 1 (Bloomberg) -- China's stocks fell, extending the biggest monthly drop since June, as faster-than-estimated manufacturing growth signaled the economy can withstand further increases in interest rates to contain inflation.
Harbin Pharmaceutical Group Co. and Shanghai Fosun Pharmaceutical (Group) Co. led declines for health-care stocks, retreating more than 2 percent, on speculation cuts in drug prices may hurt profit. Huaneng Power International Inc. paced gains by electricity producers after the Purchasing Managers' Index rose to 55.2 in November from 54.7 in October.
"The manufacturing number shows the economy is still healthy and that will give the government some confidence to push out more cooling measures,"said Deng Changrong, a strategist at Huaxi Securities Co. in Shenzhen. "The market will face downward pressure in the coming few months."
The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, fell 0.3 percent to 2,812.31 at the 11:30 a.m. break. The CSI 300 Index lost 0.4 percent to 3,125.41.
A gauge tracking health-care companies on the CSI 300 extended declines, falling 1.7 percent, the most among the 10 industry groups. Harbin Pharmaceutical slid 2.5 percent to 24.30 yuan. Shanghai Fosun retreated 2.2 percent to 14.20 yuan.
China is slashing the price of drugs made by Roche Holdings AG and Bristol-Myers Squibb Co. by about a third, part of government efforts to rein in health-care costs and cool the fastest inflation in two years.
Today's manufacturing report showed a measure of input prices climbed the most since 2008, reinforcing the case for the central bank to boost borrowing costs again after it lagged behind counterparts from Malaysia to South Korea.
Factory Output
China's manufacturing grew at the fastest pace in seven months in November, indicating the economy can withstand higher interest rates as price pressures escalate. The PMI figure was more than the 54.8 median estimate of 14 economists surveyed by Bloomberg News.
Huaneng Power, China's largest electricity producer, gained 0.9 percent to 5.87 yuan. China Yangtze Power Co., the nation's biggest hydro dam operator, advanced 1.6 percent to 7.69 yuan.
Manufacturing growth may not benefit stocks as the "good" economic data could persuade policymakers to further tighten monetary policy to fight inflation, Ting Lu, economist at Bank of America-Merrill Lynch, said in a report to clients.
The People's Bank of China raised lenders' reserve requirements for the fifth time this year on Nov. 19, a month after increasing its benchmark interest rate for the first time since 2007. Consumer prices in October were 4.4 percent higher than a year earlier. The government's full-year inflation target is 3 percent.
Inflation Outlook
China's inflation for November likely accelerated to 4.7 percent year-on-year, which may mark the "short-term peak," Credit Suisse Group AG said in a report today. Inflation will accelerate again to hit 6.2 percent mid-2011, with the year- average forecast at 5 percent, as food, commodity and service prices increase, economist Dong Tao said in the report.
The central bank will "probably" raise interest rates around Dec. 13, when the November inflation data are scheduled to be announced, the report said. Tao said he predicts interest rates to increase by about 150 basis points by end-2011.
Two-year contracts that exchange the central bank's one- year deposit rate for a fixed payment climbed 58 basis points to 3.4 percent, the biggest monthly advance since April 2007, according to data compiled by Bloomberg. Over the past two months Standard Chartered Plc and Credit Agricole SA doubled projections for the number of increases in the deposit rate by mid-2011 to four.
Tax Treatment
The end of preferential Chinese tax treatment for foreign companies should have a "benign" effect on the stock market as it won't affect larger companies that are state-owned such as banks and will hurt mostly industries including auto, technology and health-care where there is more overseas ownership, Jerry Lou and Allen Gui, analysts at Morgan Stanley, said in a report.
SAIC Motor Corp. led declines for automakers, falling 1.5 percent to 16.87 yuan. UFIDA Software Co. fell for the first time in six days, dropping 2.2 percent to 25.51 yuan.
China's stocks will resume gains, boosted by fund inflows, Erwin Sanft, head of China and Hong Kong research at BNP Paribas, said in a Bloomberg Television interview.
"Investors have already priced in a hard landing for the economy," Sanft said. He recommended banks, railway construction companies, property developers as well as large-cap stocks.
