Mainland shares decline most in two months, paring November gains

Mainland stocks fell the most in two months, amid concerns liquidity may tighten and as a technical indicator suggested the mainland market is overheating.

The Shanghai Composite Index fell 1 percent at the close, paring this month’s rise to 4.8 percent. Yanzhou Coal Mining Co led a gauge of energy companies lower on the CSI 300 Index, while Jiangxi Copper Co, Aluminum Corp of China Ltd and Angang Steel Co each dropped more than 3.3 percent. Industrial commodities such as steel and iron ore extended Tuesday’s slump. The Shanghai equity benchmark’s 14-day relative strength index on Tuesday was at its highest level since May 2015 and above the threshold some traders consider as being overbought.

China’s interest-rate swaps are heading for the biggest monthly increase in two years on speculation that rising inflation and the authorities’ plan to curb excessive borrowing will drive money rates higher. The People’s Bank of China continues to use longer term reverserepurchase agreements in openmarket operations, effectively raising the cost of funds injected into the financial system.

“The market is pretty sensitive to any perceived tilt in the liquidity stance of the PBOC, particularly into month-end,” said Bill Bowler, a sales trader at Forsyth Barr Asia Ltd in Hong Kong. “Tight liquidity can reverberate across asset classes. We’ve seen weakness in bond futures and particularly commodity futures, which could be feeding into stock market weakness.”

The PBOC may keep underlying liquidity relatively tight in the near term, with the occasional nudge raising interest rates to encourage deleveraging, Goldman Sachs Group Inc. said in a note on Nov 29.

Despite Wednesday’s drop, the Shanghai gauge capped its best month since March. Commodity producers and construction companies climbed in November amid optimism that China’s authorities will lift fiscal spending to stimulate growth, while the rollout of property curbs boosted the lure of equities. The Hang Seng China Enterprises Index also showed a monthly advance as insurers surged.

the decline in the benchmark Shanghai Composite Index on Wednesday