China's Stocks Rise Most in Six Weeks on European Debt Outlook, Valuations

China’s stocks climbed the most in six weeks on easing concern the European debt crisis will derail the global recovery and speculation this year’s bear market declines have been excessive given the earnings outlook.

China Merchants Bank Co. and Industrial Bank Co. advanced at least 2.8 percent after BNP Paribas said policy makers may ease monetary policies. Air China Ltd. added 4.7 percent after Morgan Stanley upgraded the stock. Beijing Tongrentang Co. rallied among health-care stocks on a Securities Times report the government will announce plans to boost the industry.

“The sell-off may come to an end for the time being as the situation in Europe shows the debt crisis won’t escalate,” said Wang Zheng, a fund manager at Jingxi Investment Management Co. in Shanghai. “Stocks are cheap now.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 54.79, or 2.1 percent, to close at 2,710.51, the most since March 29. The CSI 300 Index rose 2.4 percent to 2,886.91. Futures on the CSI 300 Index expiring on May 21, the most active contract, gained 2.6 percent to 2,902.8.

The Shanghai Composite has declined 17 percent this year, the world’s second-worst performer among the 93 gauges tracked by Bloomberg, on concern the government will keep tightening monetary policy to contain inflation and avert asset bubbles. percent. The measure on May 11 entered a bear market after falling 21 percent from its Nov. 23 high.

The index is valued at 20.2 times reported earnings, compared with the multiple of 37 times in July 2009, according to weekly data compiled by Bloomberg.

Concerns about a crackdown in the property market and negative interest rates may spur buying in Chinese stocks, according to investors.

‘Least Ugly Girl’

China’s $7.2 trillion of corporate and household savings is being eroded as inflation rises. Consumer prices climbed 2.8 percent in April, surpassing the one-year savings rate of 2.25 percent.

JPMorgan Chase & Co. expects China stocks to rally more than 40 percent in a year, while Robeco Group and Macquarie Group Ltd. forecast a second-half rebound.

“It becomes a question of who’s the least ugly girl at the fair,” said Victoria Mio, a Hong Kong-based senior fund manager at Robeco, whose firm oversees $194 billion worldwide. “There is some migration occurring and the shift will accelerate with a few months of negative interest rates.”

Europe Budget

The European Central Bank called on Spain and Portugal to deepen budget cuts in return after Spanish Prime Minister Jose Luis Rodriguez Zapatero cut public wages, a step the government had previously said it would not take. British Prime Minister David Cameron also pledged an emergency budget within 50 days to narrow the country’s shortfall.

Europe is China’s biggest export destination, making up 20 percent of its total overseas sales.

Merchants Bank added 2.9 percent to 14.05 yuan. Industrial Bank, part-owned by a unit of HSBC Holdings Plc, gained 2.8 percent to 28.24 yuan. Shanghai Pudong Development Bank Co., the partner of Citigroup Inc., advanced 2.7 percent to 19.71 yuan.

The curve tracking the difference between the yields on 2- and 5-year bonds has “collapsed” in the past 10 days and an inversion may signal a recession in China, BNP strategists Clive McDonnell and Ryan Tsai said in a report today. That outcome would be “unthinkable” for China, they said.

“While the yield curve is telling us that the economy is heading for a hard landing, we believe there is no appetite among policy makers for such an outcome,” the strategists wrote.

Monetary Tightening

China has ordered lenders to set aside more deposits as reserves three times this year, while implementing curbs on property speculation ranging from a ban on loans for third-home purchases to higher down-payment requirements for second homes.

Air China, the nation’s largest international carrier, gained 4.7 percent to 11.22 yuan. The carrier was raised to “overweight” from “equal-weight” by Morgan Stanley analysts led by Edward Xu, who cited the impact of a tax waiver on earnings and the recent slump in the shares.

China Southern Airlines Co., the biggest carrier by fleet size, rose 3.7 percent to 7.01 yuan. China Eastern Airlines Corp., the second largest, gained 3.9 percent to 7.21 yuan.

A gauge of health-care stocks in the CSI 300 advanced 4.5 percent, the most among the 10 industrial groups. Beijing Tongrentang jumped the 10 percent daily limit to 27.67 yuan. Guangzhou Pharmaceutical Co. gained 6.2 percent to 12.43 yuan.

The plan to boost the pharmaceutical industry, first reported last month by China Times, could be introduced over the next three months, Securities Times said.

‘Double Top’

China’s small-company stocks, which briefly entered a bear market yesterday, may extend losses after forming a “double top” on concern share prices are too expensive, according to China International Capital Corp.

The CSI Smallcap 500 Index surged to peaks of similar heights in November 2007 and April this year. The failure to strengthen beyond those highs may signal further declines. The gauge added 2.9 percent today, snapping an 11 percent decline over the past five days.

“The double top in valuations suggests caution towards small caps in the near term,” Hao Hong, Beijing-based global equity strategist at CICC, said in a report. “Valuations are very high. Small caps tend to have high beta, so in a declining market they tend to underperform.”

The following companies were among the most active in China’s markets. Stock symbols are in brackets after companies’ names.

China Pacific Insurance (Group) Co. (601601 CH), the nation’s third-largest insurer, advanced 2.3 percent to 25.54 yuan after saying it earned 53.8 billion yuan in income from premiums in the first four months of the year.

China United Network Communications Ltd. (600050 CH), which controls the nation’s second-largest cell phone operator, gained 3 percent to 5.56 yuan. Hong Kong-listed unit China Unicom (Hong Kong) Ltd. will spend between 3 billion yuan and 5 billion yuan on handset subsidies in 2010, President Lu Yimin said in Hong Kong

Inner Mongolia Yili Industrial Group Co. (600887 CH), China’s second-biggest dairy company, climbed 4.3 percent to 31.60 yuan. The company said it will invest 552 million yuan in a milk powder project in Heilongjiang province. The project will be able to produce 45,000 metric tons of milk powder a year, it said.

--Zhang Shidong. Editors: Allen Wan, Richard Frost

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-7014 or szhang5@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.