China's Stocks Rebound on Easing Tightening Outlook, Bullish Equity Calls

China’s stocks rose for a second day, led by commodity producers, on speculation Europe’s debt crisis will stop the government from further tightening monetary policy.

Jiangxi Copper Co. and Aluminum Corp. of China Ltd., the nation’s biggest makers of copper and aluminum, advanced at least 3 percent as metal prices increased. China Life Insurance Co. added 1.9 percent and Ping An Insurance (Group) Co. gained 1.2 percent after the China Securities Journal said insurers’ caps on equity investments may be raised. A measure tracking property stocks erased earlier losses, adding 0.8 percent.

The market is pricing in a “policy misstep” by China’s government, Jerry Lou, Morgan Stanley’s China strategist, said in a Bloomberg Television interview. “The whole market is a buy” as concerns are overstated, he said.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, climbed 30.13, or 1.2 percent, to 2,655.92 at the close. The CSI 300 Index added 1.6 percent to 2,859.98.

Concern that the government will step up measures to curb property speculation and government debt in Europe will prevent nations from bolstering their economies has dragged the Shanghai Composite down 19 percent this year. The slump decreased the average price of the stocks on the gauge to 19.8 times earnings, near the lowest level since February 2009.

Europe’s slowdown will delay the need for the U.S. to raise interest rates, reducing risks of a “double-dip” recession, Lou said. He shares the view of investors Martin Currie Ltd.’s Chris Ruffle and Templeton Asset Management Ltd.’s Mark Mobius, who are buying more of the nation’s stocks after they entered a bear market this month. Mobius yesterday called the slump in emerging-market shares a “correction” in a bull market.

Europe Concern

Jiangxi Copper rose 3.6 percent to 30.20 yuan. Aluminum Corp. of China Ltd., also called Chalco, gained 3.1 percent to 10.55 yuan. Zhuzhou Smelter Group Co., China’s biggest producer of refined zinc, climbed 5.7 percent to 11.16 yuan.

Copper on the London Metal Exchange gained as much as 0.8 percent to $6,835 a metric ton in Singapore, reversing a decline of as much as 0.7 percent. Aluminum in London rose 0.5 percent to $2,024 a ton, zinc advanced 0.8 percent to $1,905 a ton, and lead added 1.8 percent to $1,785 a ton.

Europe is China’s biggest export destination, making up 20 percent of its total overseas sales. A 20 percent drop in exports to the European Union would cut China’s gross domestic product growth by 1 percentage point, according to Credit Suisse.

China’s foreign exchange regulator said after the market close that reports that it was reviewing its euro holdings are “groundless.” China is a responsible long-term investor, according to a statement posted to the State Administration of Foreign Exchange’s website today. Europe has been and will be a major investment market for China, it said. The Financial Times reported yesterday that the administration met with bankers because of concerns about exposure to Europe.

‘Crash’ Needed

The Shanghai Composite entered a bear market on May 11 after falling 20 percent from its Nov. 23 high. The government has ordered banks to set aside more reserves three times this year, reined in loans for purchases of multiple homes, increased mortgage rates, and raised down payment requirements as it sought to damp house price gains.

China needs a property crash for stocks to return to a bull market because that would jolt investors into switching money to equities, former Morgan Stanley economist Andy Xie said.

“The property market is sucking in all the money,” Xie said at a forum in Beijing today. “Without the property market crashing,” a bull market in stocks is “unlikely,” he said.

Insurers Rally

China Vanke Co., the nation’s biggest listed property developer, gained 1.2 percent to 7.53 yuan after falling as much as 2.6 percent. Poly Real Estate Group Co., the second-largest, rose 0.3 percent to 11.73 yuan.

China’s insurance regulator plans to raise the cap on insurers’ investment in stocks and mutual funds to 25 percent of total assets, from 20 percent, the China Securities Journal reported today, citing people it didn’t identify.

China Life, the nation’s biggest insurer, rose 2 percent to 24.63 yuan. Ping An, the second-biggest, added 1.5 percent to 46.10 yuan. China Pacific Insurance (Group) Co., the third- largest, climbed 2.1 percent to 22.16 yuan.

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

China South Locomotive & Rolling Stock Corp. (601766 CH), the nation’s biggest maker of rail vehicles, climbed 1.4 percent to 5.03 yuan. The company said it will invest 10 billion yuan over five years in Hunan to develop the province’s rail- equipment manufacturing industry under an agreement with the provincial government and China Development Bank Corp.

Guangzhou Tech-Long Packing Machine Co. (002209 CH) jumped the 10 percent daily limit to 9.86 yuan. The stock was rated “buy” in initial coverage by analysts led by Xue Xiaobo at Citic Securities Co., who cited growth prospects for the company and beverage industry.

Guilin Sanjin Pharmaceutical Co. (002275 CH) rose 3.1 percent to 25.88 yuan, the highest since May 6. The stock was rated “outperform” in initial coverage by analysts led by Ye Fei at Shenyin & Wanguo Securities Co., who cited higher sales this year. The brokerage set a six-month share-price estimate of 30.8 yuan.

--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

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