SHANGHAI - Mainland stocks dropped for the first time in four days, led by developers and raw-material producers, on concern the government will raise borrowing costs and curb lending to prevent the economy from overheating.
Poly Real Estate Group Co and China Vanke Co, the top two developers, fell more than 1 percent after the China Securities Journal reported interest rates may rise this quarter and traders said the central bank will sell three-year bills on Thursday to drain liquidity.
"A major proportion of China's economy is supported by investment that needs loans for sustained growth," said Yan Ji, who helps oversee about $1.2 billion at HSBC Jintrust Fund Management Co in Shanghai. "The growth rate may come down if financing costs increase."
The Shanghai Composite Index fell 10.46, or 0.3 percent, to 3148.22 at the close. The CSI 300 Index declined 0.5 percent to 3386.95.
A gauge of property stocks slid 1.2 percent, the most among the Shanghai Composite's five industry groups.
Poly Real Estate, China's second-largest developer by market value, dropped 2.5 percent to 20.15 yuan. Vanke, the biggest, lost 1.5 percent to 9.46 yuan. Gemdale Corp, the fourth largest, fell 1.9 percent to 13.77 yuan.
Shandong Dong-E E-Jiao Co, a traditional Chinese herbal-medicine maker, led gains for drugmakers, adding 3.7 percent to 30.71 yuan.
The company said first-quarter profit may have jumped between 100 percent and 150 percent. It also had its 2010 earnings forecast raised 13 percent and its 2011 profit estimate lifted 17 percent at Shenyin & Wanguo Securities Co.
Yunnan Baiyao Group Co, a manufacturer of traditional Chinese medicines, gained 3.5 percent to 57.10 yuan. Guangzhou Pharmaceutical Co climbed 4.7 percent to 13.03 yuan.
"The market is turning a bit defensive so some investors are seeking stocks with definite earnings growth such as pharmaceutical companies," said HSBC's Yan.
Chongqing Dima Industry Co, a Chinese-vehicle maker, surged by the 10 percent daily cap to 8.22 yuan after saying it plans to buy a real estate development business valued at 4.3 billion yuan from its parent through a share swap.
Hang Seng rises
Hong Kong stocks rose, driving the benchmark stock index to a three-month high, on optimism the United States Federal Reserve will keep the benchmark interest rate at a record low, and as oil producers gained on higher crude prices.
Cosco Pacific Ltd, parent of the world's second-largest container-leasing company, climbed 5.3 percent.
Cnooc Ltd, China's biggest offshore energy explorer, jumped 6.4 percent. Xin'ao Gas Holdings Ltd surged to a record after Morgan Stanley raised its rating on the Chinese energy supplier to "overweight".
Melco International Development Ltd rallied 6.8 percent, leading gains among gaming shares as Macao's revenue at casinos rose 57 percent in the first quarter.
The Hang Seng Index climbed 1.8 percent to 21928.77, its highest close since Jan 12. The Hang Seng China Enterprises Index advanced 2.3 percent to 12987.82.