China’s stocks rallied the most in almost a month, led by banks, airlines and property companies, on the prospect that a stronger yuan will tame inflation and reduce the need for interest-rate increases.
China Southern Airlines Co., the nation’s largest carrier, rallied 8.2 percent after the central bank signaled that it will loosen the yuan’s peg to the dollar. Industrial and Commercial Bank of China Ltd. and China Vanke Co. added more than 2 percent after Morgan Stanley upgraded lenders and real-estate stocks.
“An appreciation in the yuan will reduce inflationary pressures and benefit consumption by increasing purchasing power,” said Shi Bo, general manager of Shanghai Elegant Investment Co., which oversees about $278 million in assets, including a fund that was ranked first among the 678 China-based funds tracked by Bloomberg. “It’s positive for stocks.”
The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 72.99, or 2.9 percent, to 2,586.21 at the close, the biggest gain since May 24. The CSI 300 Index rose 3.1 percent to 2,780.66.
Some brokerages and fund managers are getting more bullish on China’s stocks after the People’s Bank of China pledged over the weekend to make the yuan more flexible, while ruling out a one-time revaluation of the currency that’s been held at about 6.83 yuan per dollar since mid-2008.
The nation’s equities were raised to “overweight” from “neutral” at BNP Paribas, which predicted a 36 percent rally and reversed a yearlong call to favor Indian stocks instead. AMP Capital Investors Ltd., an Australian asset manager with more than $90 billion of assets, said it may buy more yuan- denominated equities in China.
China’s move to end the yuan’s fixed rate to the dollar is a “bullish catalyst” for the nation’s yuan-denominated and Hong Kong-traded stocks, Morgan Stanley said.
The brokerage upgraded banks and property stocks to “overweight,” saying yuan appreciation in the second half will help regulators manage inflation and reduce the need for further tightening.
Banks were previously rated “equal-weight” while property shares were rated “underweight,” according to a report by analysts including Jerry Lou. The analysts also said they were replacing expressways with airlines in their model portfolio.
Industrial & Commercial Bank of China, the nation’s biggest listed lender, led gains for banks, rising 2.6 percent to 4.28 yuan. China Construction Bank Corp., the second-largest, gained 3.5 percent to 4.97 yuan. Vanke, the nation’s largest developer, added 3.8 percent to 7.34 yuan. Poly Real Estate Group Co., the second-biggest, advanced 5.2 percent to 11.80 yuan.
China’s Se Shang Property Index advanced 3.8 percent today. The measure has plunged 26 percent this year, the worst performer among the five industry groups in the Shanghai Composite, after the government ordered banks to hold more of their assets in reserve, set a lower lending target for 2010, and drained liquidity through bill sales.
China Southern, the nation’s biggest carrier by fleet size, advanced 8.2 percent to 7.27 yuan. Air China Ltd., the largest international carrier, rose 6.4 percent to 11.73 yuan. China Eastern Airlines Corp., the second-largest, added 5.6 percent to 7.93 yuan.
China’s airlines are major beneficiaries of a gain in the yuan given their foreign-currency debt, while textile producers will be hurt as profit margins narrow, according to JPMorgan Chase & Co.’s Jing Ulrich.
The yuan policy shift may relieve pressure on the Chinese government to step up measures to control economic growth, said Nader Naeimi, a Sydney-based strategist at AMP Capital. The fund manager may also buy more commodity shares because a stronger yuan will boost Chinese demand for raw materials, Naeimi said, declining to name specific stocks.
Essence Securities Co., ranked second for strategy research by New Fortune magazine last year, said China’s pledge to increase the flexibility of its exchange rate won’t reverse the trend of the stock market. The brokerage remains “cautious” on shares given shrinking liquidity, slowing economic and corporate earnings growth and fundraising pressures.
The yuan climbed 0.4 percent to 6.8019 per dollar as of 3:21 p.m., from 6.8262 on June 18, the biggest gain since Oct. 7, 2008, according to the China Foreign Exchange Trading System. The 12-month non-deliverable yuan forward strengthened 1.4 percent to 6.6209 per dollar, implying that traders are betting on a 2.7 percent appreciation.
The Shanghai gauge fell 2.2 percent last week on concern valuations for pharmaceutical and technology companies were excessive relative to the earnings outlook. It has lost 21 percent this year, Asia’s worst performer, on concern government measures to rein in housing prices and the European debt crisis will damp growth.
The following companies were among the most active in China’s markets. Stock symbols are in brackets after companies’ names.
Hainan-based stocks: Hainan Zhuxin Investment Co. (600515 CH), a department store operator, climbed 5.1 percent to 6.66 yuan. Hainan Zhenghe Industrial Group Co. (600759 CH) surged the 10 percent daily cap to 6.72 yuan.
China’s National Development and Reform Commission approved a plan to make Hainan province an international tourism destination, the Shanghai Securities News reported today, without citing anyone.
Chongqing Brewery Co. (600132 CH) rose 3.1 percent to 37.50 yuan after the Shanghai Securities News reported today operations have returned to normal after workers ended a strike.
Wuhan Kaidi Electric Power Co. (000939 CH) slumped the 10 percent daily limit to 13.95 yuan after the securities regulator rejected its application for a private share placement.