China's Stocks Advance, Capping Shanghai Composite's Best Week This Year

China’s stocks rose, capping the benchmark index’s best week in seven months, on speculation the government won’t introduce more measures to curb bank loans and property prices after leaders pledged policy stability.

Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. climbed at least 0.6 percent after Premier Wen Jiabao said stable policies should be the main theme in the second half. Jiangxi Copper Co. paced gains among metals producers on higher commodity prices. Shenzhen Kingdom Sci-Tech Co., a developer of financial security software, dropped the most in a week after saying first-half profit probably fell due to rising wage costs.

“The macro adjustment will be very modest in the second half and you won’t see any draconian measures like what the government did in the first half,” said Li Jun, a strategist at Central China Securities Holdings Co. in Shanghai. ‘Sentiment is improving and very favorable for a rebound in stocks.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 9.62, or 0.4 percent, to 2,572.03 at the 3 p.m. close. The CSI 300 Index rose 0.4 percent to 2,793.08.

The Shanghai index advanced 6.1 percent this week, the biggest weekly gain since Dec. 4, on expectations the government will relax property curbs and allow for more bank lending to counter a slowdown in economic growth. Energy and material stocks climbed the most this week, while consumer staples and utilities, considered defensive stocks, lagged behind.

The central bank has raised banks’ reserve requirements three times this year and the government boosted down payments and mortgage rates for multiple-purchases of homes to curb record lending growth and asset bubbles. The Shanghai index has fallen 22 percent this year on concern measures to control real- estate speculation and rising consumer prices will damp earnings.

Domestic Demand

Premier Wen also highlighted the importance of expanding domestic demand, saying that China would “improve” stimulus measures for boosting consumption. The comments by Wen and President Hu Jintao were published by Xinhua News Agency on a government website yesterday.

Hu said China will continue to implement a proactive fiscal policy and moderately loose monetary policy. Wen said the government would boost domestic consumption in the second half, while continuing to balance the goals of relatively fast growth, restraining inflation expectations and restructuring the economy.

“The fact the government won’t intensify tightening itself is good news,” said Zhang Qi, an analyst at Haitong Securities Co. in Shanghai. “Low valuations and good sentiment may carry on the rally.”

Banks Gain

ICBC, the nation’s biggest listed lender, rose 1.4 percent to 4.32 yuan. Bank of China added 0.6 percent to 3.57 yuan. Agricultural Bank of China, the world’s biggest initial public offering this year, climbed 2.9 percent to 2.81 yuan.

China Everbright Bank Co. plans to sell as many as 6.1 billion shares in Shanghai in an initial public offering that analysts estimate may raise as much as 18 billion yuan ($2.7 billion). Chinese companies raised 215.3 billion yuan from IPOs in the first half, the highest this decade, according to data compiled by Bloomberg.

China’s stocks may be starting a “new bull market” that could help the Shanghai Composite rally 21 percent by the end of the year, according to JPMorgan Chase & Co. technical analysts.

The Shanghai Composite touched 2,319.74 on July 2, reaching the lower trend line that had marked its decline from the August 2009 high. That’s the last of three major downside targets needed to “build a positive macro case” for the resumption of the “bull cycle” that started in October 2008, according to chief technical strategist Michael Krauss and David Cohen.

‘Bullish Confirmation’

A rally in Chinese shares this week helped the Shanghai index end the trading day above the 2,500 level for three consecutive sessions, the “first positive sign,” according to the analysts. They said closes above 2,650 over the next few weeks would be “very bullish confirmation” of a rebound that may take the index to as high as 3,100 by the end of 2010, representing a 21 percent gain from yesterday’s close.

“Chinese stocks have been huge underperformers for the past 12 months and now show potential to outperform all global equity indexes in the next six to 12 months,” the analysts wrote in a report.

A gauge of material stocks in the CSI 300 rallied 8.6 percent this week, while a measure of energy producers jumped 9.5 percent. Jiangxi Copper, China’s biggest producer of the metal, gained 1.3 percent to 29.02 yuan today. Tongling Nonferrous Metals Group Co., the second biggest, rose 1.8 percent to 15.92 yuan.

Crude oil rallied 3.6 percent in New York yesterday, while the London Metal Exchange Index, a measure of six metals including copper and zinc, rose 2.3 percent.

‘Heading Higher’

Shanghai Shimao Co. climbed 1 percent to 13.76 yuan, the highest since April 16, after the developer said first-half net income may have risen about 700 percent from a year ago. A gauge of property stocks gained 6 percent this week.

Shenzhen Kingdom Sci-Tech dropped 2.1 percent to 10.39 yuan. First-half profit probably fell 70 percent from a year ago due to rising wage costs, the company said in an exchange filing. Utility stocks also dropped the most in the CSI 300 today, losing 0.5 percent.

China’s stock markets are “heading higher” given the perception among investors that slowing economic growth and easing inflation will spur the government to ease its policy tightening, according to Samsung Securities.

“Market sentiment is beginning to turn, as reasons for investors to anticipate the end of the tightening cycle have appeared with the likely slowing of economic-growth momentum into 2H and dissipating expectations of inflationary pressure,” Alfred Chin, a Hong Kong-based strategist, wrote in a note.

He said the market doesn’t need a policy reversal to rally. Instead, dissipating uncertainty over further policy tightening measures would be sufficient, Chin said.

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

Dingsheng Tiangong Construction Machinery Co. (600335 CH) jumped the 10 percent daily limit for a second day to 9.90 yuan on plans to swap its assets with China Automobile Trading Co.

Yabao Pharmaceutical Group Co. (600351 CH) gained 4.3 percent to 8.55 yuan, the highest since June 24. The stock was rated “outperform” in initial coverage by Citic Securities Co. analysts led by He Juying, who cited low valuation and growth potential. The brokerage set a share-price estimate of 9.3 yuan.

--Zhang Shidong. Editors: Allen Wan, Stephanie Wong

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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