China Stocks Rise to 4-Month High as Material Producers Rally; Banks Drop

China’s stocks rose to the highest in almost four months as speculation the government will curb overcapacity to meet energy efficiency targets fueled a rally for the nation’s biggest metal producers.

Maanshan Iron & Steel Co. jumped by the maximum 10 percent limit after JPMorgan Chase & Co. said steel prices have “further upside” on policies to reduce energy consumption. Yunnan Aluminium Co. rose the most in 11 months. The market’s gains were limited as banks fell after Guosen Securities Co. said regulators plan to impose loan-loss reserves on lenders.

“The government’s plan to save energy will benefit big players in energy-consuming industries such as steel because it will weed out smaller rivals,” said Wei Wei, an analyst at West China Securities Co. in Shanghai.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, climbed in the last 15 minutes of trading, gaining 2.11, or 0.1 percent, to 2,698.36 by the 4 p.m. close. It fell as much as 0.6 percent earlier. The CSI 300 Index added 0.3 percent to 2,983.11.

The Shanghai measure has rebounded 14 percent from this year’s low on July 5 as investors speculated the government would ease monetary policy to spur growth. That’s trimmed this year’s loss to 18 percent, after the government increased down- payment requirements on home sales and ordered banks to set aside more deposits as reserves to curb asset bubbles.

A gauge of material producers rose 1.8 percent for the biggest gain among the 10 industry groups in the CSI 300 Index. The measure has rallied 11 percent over the past month, fueled by the prospect of industrial consolidation and speculation the nation’s economic slowdown has peaked.

Industrial Mergers

“The worst of China’s economic slowdown has passed and inflation won’t worsen,” Wei Li, economist at Standard Chartered Bank (China) Ltd., said in an interview in Shanghai.

China will promote consolidation of companies in the automobile, cement, steel, machinery, rare earth and aluminum industries via mergers and acquisitions, the State Council said in a statement yesterday.

The rally for China’s steelmakers and metal prices has “further upside” as the government introduces stricter policies to reduce energy consumption by the end of the year, according to JPMorgan Chase & Co.

The government faces a “very arduous” task in cutting energy consumption by year-end to meet an efficiency target, Xin Guobin, an official with the industry ministry, said at a briefing today.

Maanshan Steel, which announced plans to invest in Anhui Changjiang Iron & Steel Co., jumped 10 percent to 3.94 yuan, the biggest gain in a year. Hebei Iron & Steel Co., the listed unit of China’s biggest steelmaker, added 2.4 percent to 4.29 yuan, extending yesterday’s 6.9 percent advance.

Steel Prices

Benchmark hot-rolled steel prices in China rose 3.5 percent yesterday as steelmakers in Hebei province shut mills after the local government limited electricity supply to reach power efficiency targets.

Yanzhou Coal Mining Co., the listed unit of the fourth- biggest coal miner, added 1.9 percent to 19.02 yuan after saying it will seek to acquire 51 percent of Inner Mongolia Haosheng Coal Mining Ltd. to increase its reserves.

Industrial output will slow to about 10 percent in the second half, Xin said. Real-estate curbs and a higher base for comparisons will also contribute to smaller output gains.

The nation’s economy, the world’s second biggest after overtaking Japan in the second quarter, is still growing steadily and isn’t at risk of a “second dip,” Xin told reporters.

Banks Decline

Industrial Bank, part-owned by a unit of HSBC Holdings Plc, declined 0.9 percent to 26.25 yuan. China Construction Bank Corp., the nation’s second-largest lender, lost 0.4 percent to 4.71 yuan.

The banking regulator is drafting a plan to require banks to maintain loan loss reserves of 2.5 percent of total lending, Guosen Securities Co. analyst Qiu Zhicheng said in a note distributed to clients today. The report cited an unidentified China Banking Regulatory Commission official speaking at a financial conference hosted by the securities firm.

The China Banking Regulatory Commission currently doesn’t oblige banks to keep a ratio of their total loans as reserves. Instead, it requires them to maintain reserves of at least 150 percent of non-performing loans. The nation’s lenders had an average coverage ratio of 186 percent by the end of June, according to the regulator.

--Zhang Shidong. Editors: 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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