China's Stocks Post Best 3-Day Gain in 2010 on Energy, Consumption Outlook

China’s stocks rose for a third day as the outlook for increased investment in the clean energy industry and higher domestic consumption overshadowed concern the government won’t relax its policy tightening measures.

Jiangsu Huasheng Tianlong Photoelectric Co. paced gains for alternative fuel stocks as China said it may spend 5 trillion yuan in the next decade developing cleaner energy sources. Air China Ltd. and China Southern Airlines Co. climbed more than 2 percent after domestic carriers flew more passengers last month. China Vanke Co. and Poly Real Estate Group Co. slid 0.8 percent on concern the government may maintain lending curbs.

“The new energy industry represents structural change for China’s economy and has huge growth potential,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The market still has some doubts about cyclical stocks as the government hasn’t make clear its attitude towards easing tightening measures.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 0.3 percent to 2,535.39 at the 3 p.m. close. The measure has gained 4.6 percent in the past three days, the most for such a period since December 2009. It also breached its 50-day moving average intraday for the first time in three months. The CSI 300 Index rose 0.2 percent to 2,747.33.

The Shanghai index has advanced this week on the expectation the government will ease tightening measures and boost investment in low-income houses to counter a slowdown in economic growth. It’s still down 23 percent this year on concern measures to control real-estate speculation and rising consumer prices will damp earnings.

China’s economic expansion eased to 10.3 percent in the second quarter and industrial production cooled more than forecast in June. The central bank has raised reserve requirement ratios three times this year to rein in consumer prices and investment growth.

New Energy Stocks

The government will submit plans to develop cleaner energy, including nuclear power and gas from unconventional sources, in 2011 to 2020 to the State Council, or Cabinet, for approval, Jiang Bing, head of the National Energy Administration’s planning and development department, said in Beijing yesterday.

Jiangsu Huasheng added 3.3 percent to 24.83 yuan. Baoding Tianwei Baobian Electric Co., which has units making solar panels, gained 4.3 percent to 21.42 yuan.

China is developing new fuel sources after overtaking the U.S. as the world’s biggest energy user last year.

Airline stocks rose. The companies carried 21.8 million passengers in June, 23 percent more than a year earlier, the Civil Aviation Administration of China said on its website yesterday. Passenger numbers rose 18 percent to 126.3 million people in the first half from a year earlier, the regulator said.

Airlines Gain

Air China, the nation’s largest international carrier advanced 2.6 percent to 12.06 yuan. China Southern, the nation’s biggest carrier by fleet size, gained 3.3 percent to 6.95 yuan.

“We’re mega-bullish on airlines” given their valuations and profit potential, Ally Ma, an analyst at Citigroup Inc. in Hong Kong, said in a Bloomberg Television interview today.

Shenyin & Wanguo Securities Co. said in a report July 19 slowing economic growth won’t reduce demand for air travel.

The industry will benefit from the government’s plan to encourage domestic consumption, boosting airlines and tourism stocks, Shenyin & Wanguo analysts led by Zhou Meng said.

The Shanghai Composite’s “false breakdown” below 2,500 sets the stage for a rally that may take the measure past the 50-day moving average for the first time in three months to 2,720, said Auerbach Grayson & Co.

‘False Breakdown’

“The Shanghai Composite is displaying some very nice price action and the inertia generated by the ‘false breakdown’ below 2,500 has potentially set the stage for a meaningful reversal in trend,” Richard Ross, global technical strategist at Auerbach Grayson in New York, wrote in a note to clients. “A move above the 50-day moving average could provide the catalyst for a test of our initial upside target of 2,720.”

A gauge of property stocks in the Shanghai Composite fell 0.3 percent. Vanke, the nation’s biggest listed property developer, declined 0.8 percent to 7.75 yuan. Poly Real Estate Group, the second largest, slid 0.8 percent to 11.83 yuan.

The banking regulator reiterated previous orders for bank to step up scrutiny of lending to local government financing vehicles and to curb credit to new investment projects run by local authorities, Chairman Liu Mingkang said yesterday.

Banks must adhere to restrictions on lending to property developers and mortgage loans to individuals, Liu said. They should also conduct “stress tests” on their lending for real- estate projects and other sectors related to property to ensure they properly understand and can cope with the risks they’ve taken on, the regulator said.

No Relaxation

China won’t relax policies aimed at restraining property prices any time soon, according to HSBC Holdings Plc’s Greater China Chief Economist Hongbin Qu.

“It is unrealistic for the market to expect policy easing in China any time soon,” Qu said in an interview in Hong Kong. “Yes, the economy is slowing and that is controlling upside pressure on inflation. But premature easing could easily fuel inflationary expectations and lead to a quick rebound in property prices.”

--Zhang Shidong. With assistance from Nick Gentle in Hong Kong. Editor: Allen Wan

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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