China's Stocks Rebound as Bank Stress Test Concerns Ease, Food Shares Rise

China’s stocks rebounded, extending gains for the benchmark index to a third week, as concerns about banks’ stress tests eased and agriculture companies advanced after the worst floods in a decade boosted food prices.

Bright Dairy & Food Co., the country’s second-largest listed dairy-product maker, and Heilongjiang Agriculture Co. jumped more than 2 percent as Morgan Stanley said floods caused a “big rally” in vegetable prices, spurring inflation. Bank of Communications Co. led a rebound in lenders after the banking regulator said scenarios lenders are required to use in stress tests don’t represent its outlook on the property market.

“I don’t think such a stress test indicated that the CBRC expects the property market would decline 60 percent,” Hao Hong, global equity strategist at China International Capital Corp., the top-ranked brokerage for China research in Asiamoney’s annual survey, said in a report.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 37.64, or 1.4 percent, to 2,658.39 at the 3 p.m. close, reversing an earlier 0.8 percent decline. The gauge gained 0.8 percent for the week. The CSI 300 Index rose 1.6 percent to 2,897.66.

The Shanghai index has rebounded 12 percent from this year’s low set on July 5 as investors speculated the government will ease property curbs and allow more lending to counter a slowdown in economic growth. The benchmark measure is still down 19 percent in 2010, the world’s second-worst performer.

Banks Rebound

Banks and property developers recovered today after regulators said suggested risk factors aren’t meant to signal likely changes in real-estate lending policies. Lenders will be instructed to “resolutely” curb speculation and “strictly” manage mortgage loans, they said.

Stocks dropped yesterday after a person familiar with the matter said the regulator told banks to conduct stress tests that assume housing prices may drop as much as 60 percent in worst-case scenarios in some cities.

Bank of Communications, part-owned by HSBC Holdings Plc, rose 2.5 percent to 6.54 yuan. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, added 0.7 percent to 4.26 yuan. China Construction Bank Corp., the second largest, climbed 0.8 percent to 4.87 yuan.

Banks have shown “resilient asset quality” on their loans to developers and mortgage borrowers in a previous test assuming a 30 percent decline in home prices, CICC’s Hong said.

Poly Real Estate Group Co., China’s second-largest developer by market value, gained 1.3 percent to 12.66 yuan, rebounding from yesterday’s 1.4 percent loss. Gemdale Corp., the fourth largest, added 0.6 percent to 6.93 yuan. A gauge of property stocks rose 0.3 percent, erasing a drop of as much as 2.4 percent.

A measure tracking consumer staple producers climbed 6.5 percent this week, the most among the 10 industries of the CSI 300, boosted by speculation they will be more resilient in an economic slowdown.

Policy Easing

“The slowing in Chinese growth points to a relaxation of tightening measures sometime in the next few months,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $95 billion, in an e-mail. “The key message is that growth in China is slowing but not collapsing.”

Bright Dairy led gains for consumer stocks, adding 2.7 percent to 9.04 yuan. Heilongjiang Agriculture, which plants crops from rice to corn, advanced 5.4 percent to 13.80 percent. The stock completed its best weekly gain in three months. Guizhou Chitianhua Co., which makes fertilizers, surged 7 percent to 6.57 yuan.

Flood Damage

“Consumption has to grow as a proportion to the economy,” said Jesper Madsen, a fund manager at San Francisco-based Matthews International Capital Management.

China has sent teams of agricultural experts to 11 provinces to help repair damage sustained by rice and corn crops from recent floods, the farm ministry said in a statement.

The government called for restoration of farm activities in major corn producing regions including northeast provinces of Heilongjiang, Jilin and Liaoning, as well as southern provinces including Hunan and Hubei, where floods damaged the rice crop, according to the statement dated yesterday.

The flooding has killed more than 1,000 people in China, making it the deadliest since 1998 when some 4,000 died. Rice production may drop by about 10 percent this year because of floods, industry web site cngrain.com said July 20.

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

China CIFCO Investment Co. (000996 CH) gained 6.8 percent to 30.31 yuan, the biggest gain since June 30, after the futures brokerage canceled a restructuring plan. The company won’t pursue restructuring in the next three months, it said. The stock resumed trading after being suspended on July 7.

Daqin Railway Co. (601006 CH), the operator of China’s biggest coal transport network, added 2.2 percent to 8.74 yuan after saying it obtained approval from the securities regulator to issue 2 billion new shares.

Sany Heavy Industry Co. (600031 CH), China’s biggest maker of machinery for handling concrete, gained 5 percent to 23.51 yuan after the company said it expects net income to increase at least 150 percent from a year earlier.

Western Mining Co. (601168 CH), China’s fourth-largest maker of zinc concentrate, climbed 3.4 percent to 11.35 yuan after the company said first-half net income jumped about 12- fold from a year earlier.

--Zhang Shidong. With assistance from Chua Kong Ho in Shanghai. Editors: Allen Wan, Richard Frost

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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