China's Stocks Rally for Biggest Two-Day Gain Since May on Policy Outlook

China’s stocks rallied, sending the benchmark index to its biggest two-day advance since May, as the prospect the government may relax its policy tightening measures spurred gains for the nation’s banks and property companies.

Poly Real Estate Group Co. and Gemdale Corp. surged at least 2 percent after International Strategy & Investment Group and Morgan Stanley said China may loosen measures to curb overheating as the economy slows. SAIC Motor Corp. led an advance for automakers after the company said its first-half profit may have quadrupled. Citic Securities Co. climbed 2.6 percent after the China Securities Journal reported the government may allow foreign investors to trade index futures.

“China is a potent force of growth,” Robert Doll, vice chairman of BlackRock Inc., said in a Bloomberg Television interview today from New York. “We do think they have the muscle to help continue the emerging markets being the leader of the world’s growth scene.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, rose 53.31, or 2.2 percent, to 2,528.73 at the 3 p.m. close. The measure, which gained 2.1 percent yesterday, had its best two-day rally since May 24 and advanced the most among 93 global indexes tracked by Bloomberg.

The Shanghai Composite has declined 23 percent this year, the worst performance among benchmark Asian gauges, on concern measures by the government to control real-estate speculation and rising consumer prices will damp growth.

‘Visible Softening’

China’s policy cycle has troughed and investors may see a “visible softening” in the government’s policy tone in the third quarter, according to Morgan Stanley. China may revise up its loan targets while investment project approvals may be eased by the fourth quarter, Qing Wang and Steven Zhang, Morgan Stanley economists, wrote in a note to clients.

Falling housing prices and slowing economic growth may give policymakers leeway to adjust their tightening policies after they increased bank reserve requirements three times this year to curb record loan growth and asset bubbles. China’s economic expansion eased to 10.3 percent in the second quarter and industrial production cooled more than forecast in June.

China’s slower growth shows the nation’s macroeconomic policies are working and that growth has gradually been restored to “normal,” Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in a commentary published in today’s China Daily newspaper.

‘Back Away’

The nation will “back away” from its tightening policies in the housing market within three months as the economy faces a bigger risk from a slowdown than inflation, according to Donald Straszheim, senior managing director for China research at ISI.

“The policy launched in April has totally demoralized both home buyers and developers with no promise of lasting benefits,” Straszheim wrote in a note to clients. “We expect Beijing to quietly relax their lending restrictions and to launch a variety of supply-side initiatives to increase the amount of housing for low-and middle-income homebuyers.”

Poly Real Estate, China’s second-largest developer by market value, rose 2.9 percent to 11.93 yuan. Gemdale, the fourth largest, gained 2 percent to 6.69 yuan.

Home prices in Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen may decline 20 percent from current levels in the second half, the China Business News reported today, citing real estate broker Centaline Property Agency Ltd.

No Double Dip

China won’t face an economic double dip in the second half of this year, Zhu Hongren, the Ministry of Industry and Information Technology’s chief engineer, said at a briefing.

The Ministry of Housing and Urban-Rural Development last week reiterated that it will maintain curbs on speculative purchases and increase market supply. The banking regulator also said it has made no changes to policies on home loans. It called on commercial banks to strictly enforce home loans.

China should use “flexible measures” such as providing more subsidies for the poor and reducing tax duties to curb inflation, the China Securities Journal reported today, citing Li Daokui, an advisor to the central bank.

China’s major insurance companies have begun to add “strategic positions” in equities by buying stocks directly and through mutual funds, Shanghai Securities News reported today. They bought financial stocks and consumer companies with low valuations, it said.

Banks Gain

Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, added 1.2 percent to 4.24 yuan. China Construction Bank Corp., the second largest, rose 0.8 percent to 4.81 yuan.

The government is seeking to offset a slowdown in export growth by boosting domestic consumption. Domestic consumption will become the most important element of the nation’s economic growth in the future, the commerce ministry said in Beijing. In the second half of this year, consumption will continue to grow at a relatively fast pace, spokesman Yao Jian said.

SAIC Motor gained 0.8 percent to 14.36 yuan. China’s largest carmaker said its first-half net income may have more than quadrupled from a year earlier after vehicle sales rose.

FAW Car Co., which makes passenger cars in China with Volkswagen AG, added 2.2 percent to 17.07 yuan. Chongqing Changan Automobile Co., the Chinese partner of Ford Motor Co. and Mazda Motor Corp., rose 4.8 percent to 9.96 yuan.

Index Futures

China may allow qualified foreign institutional investors, or QFIIs, to use as much as 10 percent of approved investment quotas to trade stock-index futures, China Securities Journal reported today, citing an unidentified person.

“The significance lies in the fact the index-futures market will see foreign capital inflows and the market will become more international,” said Jiao Hongmei, an analyst at Citic Newedge Futures Co. in Shanghai. “Still, the initial participation will be limited given the 10 percent ceiling.”

Citic Securities, China’s biggest listed brokerage, climbed 2.6 percent to 12.06 yuan. Haitong Securities Co. rose 3.1 percent to 9.56 yuan. Guoyuan Securities Co. gained 3.1 percent to 12.50 yuan after saying it plans to list a unit based in Hong Kong on the city’s stock exchange.

Zijin Mining Group Co., China’s largest gold producer, jumped the 10 percent daily limit to 5.73 yuan as brokerages said recent losses were excessive. The shares had plunged 10 percent before today in the week since the company announced acid-laced water had leaked from its largest mine.

Zijin Valuations

“Because of the pollution scandal, Zijin’s price is relatively low compared to other gold mining companies,” Geng Nuo, analyst at Great Wall Securities Co., said in a phone interview. At Shenyin & Wanguo, analyst Peggy Ye said the gains weren’t unusual. “It’s a bounce from the bottom,” she said.

Zijin Mining today expressed “deep regret” for the leak of and a nine-day delay in admitting to the breach and losses caused to fish farmers.

China’s stocks probably ended a slump after reaching a low earlier this month, according to CLSA Asia-Pacific Markets.

The CSI 300 Index, a measure of yuan-denominated shares traded on the Shanghai and Shenzhen stock exchanges, yesterday rose the most in more than a week to close at 2,682.47. That’s 8.9 percent higher than this year’s intraday low of 2,462.20 July 2, near the 50 percent retracement level of the 2008 to 2009 advance, according to the Fibonacci sequence.

That “key support zone,” along with a “bullish divergence” between its price and 14-day relative strength index, a momentum indicator, suggests that the measure “has either completed a corrective move from the August 2009 peak is close to doing so,” analysts Laurence Balanco and Tiara Fontanilla wrote in a report yesterday.

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

Coal stocks: Datong Coal Industry Co. (601001 CH), China’s third-largest coal company by capacity, surged 9.9 percent to 31.77 yuan, the most since Nov. 16. Sdic Xinji Energy Co. (601918 CH) rose 2.4 percent to 11.74 yuan after the coal producer said profits in the first six months probably rose 32 percent from a year earlier.

China’s coal stocks may rise as much as 30 percent as expectations have eased about the falling demand for the fuel and limited supplies keep prices stable, analyst Zhan Lingyan at Shenyin & Wanguo Securities Co. wrote in a report today.

Huayu Automotive Systems Co. (600741 CH) added 2.5 percent to 9.18 yuan after the company said profit in the first half of this year will more than double from a year ago on higher orders.

--Zhang Shidong. With assistance from Shiyin Chen in Singapore, Shani Raja in Sydney and Susan Li in Hong Kong. Editors: Allen Wan, Reinie Booysen

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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