China's Stocks May Rally Tomorrow After Yuan Policy Move, CICC, SocGen Say

China’s pledge to make the yuan more flexible may boost shares denominated in the currency when markets open tomorrow, China International Capital Corp. and Societe Generale SA said.

“If it leads to appreciation for the yuan, it’s good news for the market,” Hao Hong, global equity strategist for CICC in Beijing, said in a report today. “Investors will want to get into Chinese assets because they will be worth more. It will also deflect political criticism and help stem inflation.”

The People’s Bank of China said yesterday that it will “increase the renminbi’s exchange-rate flexibility” after the economy improved. Officials have kept the yuan, also known as the renminbi, at about 6.83 per dollar since July 2008, aiding the nation’s exporters and fueling tensions with trade partners.

A stronger yuan would aid Chinese companies by boosting their purchasing power, while the likelihood of the currency appreciating is an incentive for foreign investors to buy yuan- denominated stock, Glenn Maguire, a Hong Kong-based economist for the French bank, said in a phone interview today.

“It’s probably going to be a positive for the A-share market,” Maguire said. “It makes A-share valuations look more attractive,” he said, declining to estimate how much shares may gain. The local-currency A-shares rose in 2005 when China revalued its currency, he added.

The Shanghai Composite Index has tumbled 23 percent this year as the government pares stimulus measures and Europe’s sovereign-debt crisis adds to the risk of a renewed global slump. In 2005, the benchmark, which covers both A shares and foreign- currency B shares, rose 2.5 percent on July 22, the day after the government revalued the currency.

China Petroleum & Chemical Corp., Asia’s largest refiner, said today that it would benefit from yuan gains.

‘Obvious’ Result

“Almost all of our sales are on the domestic Chinese market and we purchase a great deal of raw oil for processing from overseas,” spokesman Huang Wensheng said by phone. “If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one.”

CICC’s Hao expects airlines and paper producers to benefit most from possible yuan appreciation, saying it will reduce the cost of raw materials such as fuel oil and pulp. CICC was the top-ranked brokerage for China research in the annual survey by Asiamoney magazine.

Shares of raw-material importers such as Sinopec, and companies with dollar-denominated debt, such as China Southern Airlines Co., gained in trading after the revaluation in 2005.

The situation this year isn’t entirely the same. The central bank’s announcement yesterday that it will scrap an effective peg to the dollar didn’t include a one-off gain for the currency. In 2005, the yuan immediately rose 2.1 percent as part of a policy shift.

The latest policy shift may support the currencies of Taiwan, South Korea and Australia, economies closely linked to China, over the rest of this year, Maguire said. A stronger currency because of “gradual” appreciation will boost the country’s purchasing power, he said.

--Paul Panckhurst, Allen Wan. Editors: John Liu, Allen Wan

To contact Bloomberg News staff for this story: Paul Panckhurst at +86-10-6649-7574 or ppanckhurst@bloomberg.net

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