China Stock Index Advances Most Since October as Tightening Concern Wanes

China’s stocks rallied, driving the benchmark index to its biggest gain since October, on speculation policy makers will rein in efforts to cool the economy as Europe’s debt crisis threatens a global recovery.

China Vanke Co., the nation’s biggest listed developer by market value, jumped 4.2 percent after an economic planning official said the nation should be cautious about introducing new tightening measures. Beiqi Foton Motor Co. rose 6.3 percent after Shanghai Securities News reported the government will extend subsidies for trade-in vehicles to the end of this year.

“The market is expecting a softening in the government’s stance on tightening given the uncertain outlook on global growth,” said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million.

The Shanghai Composite Index climbed 89.90, or 3.5 percent, to close at 2,673.42. That’s the biggest gain since Oct. 9, when the gauge surged 4.8 percent amid evidence of a global economic recovery. The CSI 300 Index added 3.8 percent to 2,873.47.

The Shanghai gauge fell 4.2 percent last week, extending a 21 percent decline for the year, on concern Europe’s debt crisis may curb demand for the country’s exports at the same time as the government intensifies steps to curb bubbles in assets including real estate.

President Hu Jintao said China will move gradually and independently in making changes to the nation’s exchange-rate mechanism as talks with the U.S. opened in Beijing today.

Developers Gain

Vanke advanced 4.2 percent to 7.70 yuan. Poly Real Estate Group Co., the second-largest builder, added 8.9 percent to 12.15 yuan.

A measure of property stocks jumped 4.6 percent on the Shanghai Composite Index, the biggest gain among the five industry groups. The gain caps a two-day, 8.9 percent rise for the real-estate index, the most since May 2009.

China should be cautious in introducing new tightening measures as the global economic environment is complex, Xu Lianzhong, an official with the National Development and Reform Commission’s price monitoring center, wrote in a commentary published today in the China Securities Journal. The European debt problem is one of many global economic uncertainties that China faces, Xu wrote.

Europe is China’s biggest export destination, making up 20 percent of its total overseas sales. The yuan has appreciated more than 14 percent against the euro in the past four months and the gain is putting pressure on China’s exporters, Ministry of Commerce spokesman Yao Jian said May 17.

Interest Rates

China is unlikely to raise interest rates in the “near term” as inflation slows, Citic Securities Co. said yesterday. Standard Chartered Bank cut its forecast for interest-rate increases this year to none from two. The government may postpone an increase in borrowing costs until the third quarter, BNP Paribas said last week.

China has reined in loans for purchases of multiple homes, increased mortgage rates and down payment requirements as home prices jumped a record 12.8 percent in April from a year earlier. The central bank ordered lenders this month to set aside more deposits as reserves for a third time in 2010.

“Many market observers consider that the recent policy campaign against property speculation runs a high risk of causing a hard landing for the overall economy in general,” analysts at Morgan Stanley led by Qing Wang, wrote in a report today. “The potential negative impact is greatly overstated.”

Domestic Demand

Boosting global economic growth is an “urgent and arduous” task, Chinese Vice Premier Wang Qishan said today in Beijing at the Strategic and Economic Dialogue. China is committed to expanding domestic demand, he said.

Beiqi Foton added 6.3 percent to 18.70 yuan. FAW Car Co. gained 4.3 percent to 17.90 yuan.

The government will extend subsidies for trade-in vehicles to the end of this year, the Shanghai Securities News said, citing unidentified people. The trade-in policy for vehicles was due to expire on May 31 after its introduction on June 1, 2009.

Andy Mantel, managing director of Pacific Sun Investment Management Ltd., sees further losses for China’s stocks as investors avoid bank shares as the need to raise additional capital increases.

“I’m still bearish,” Mantel said in a phone interview from Hong Kong. “I still see more downside the rest of this year. I would avoid the banks.”

Cross-Straits Ties

Airlines rose after China and Taiwan agreed to add 100 direct cross-strait flights a week, according to a statement by Taiwan’s Civil Aeronautics Administration on May 22.

Air China Ltd., the nation’s largest carrier by market value, climbed 7.3 percent to 11.26 yuan, the most since Dec. 14. China Eastern Airlines Corp. advanced 5 percent to 7.51 yuan.

Chinese visitors to Taiwan in the first quarter outnumbered Japanese for the first time on record as relaxed rules spurred travel to an island off limits to mainlanders for 60 years. The statistics bureau said last week that Chinese visitors tripled in the first quarter from a year earlier.

Energy and chemical makers based in Xinjiang advanced after China National Radio reported the central government plans to spend 50 billion yuan ($7.3 billion) to expedite coal, power and pipeline projects in the province three times the size of France.

Xinjiang Tianfu Thermoelectric Co. increased by the daily limit of 10 percent to 11.75 yuan while oil and gas supplier Xinjiang Guanghui Industry Co. advanced 8.9 percent to 29.66 yuan, the highest since the stock first traded in May 2000.

The following stocks also rose or fell in China trading. Stock symbols are in parentheses after company names:

Guangdong Electric Power Development Co. (000539 CH), an operator of power plants, gained 3.8 percent to 6.54 yuan. China Merchants Securities Co. raised the stock rating to strong buy” from “buy,” citing its development potential.

Zhejiang Hisun Pharmaceutical Co. (600267 CH), a manufacturer of anti-tumor medicine, gained 3.9 percent to 27.51 yuan, after Donghai Securities Co. gave the stock an “outperform” rating in new coverage.

--Chua Kong Ho in Shanghai. Editors: Richard Frost, Allen Wan

To contact Bloomberg News staff for this story: Chua Kong Ho in Singapore at +65-6212-1130 or kchua6@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.