China's Stocks Rise After Rate Increase; Insurers Rally, Developers Plunge

China’s benchmark stock index rose to a six-month high on speculation the nation’s first interest- rate increase since 2007 will help tame inflation and contain asset bubbles.

China Life Insurance Co. and Ping An Insurance (Group) Co. rose more than 4 percent after Mirae Asset Securities said insurers will outperform in a rising rate environment. Liquor maker Kweichow Moutai Co. and Tsingtao Brewery Co. led gains among consumer stocks that are less dependent on the economy. China Vanke Co. and Poly Real Estate Group Co. slumped at least 6 percent as higher borrowing costs may deter demand for housing.

“The interest-rate increase is more of a symbolic move and won’t have too much impact on the ample liquidity,” said Zhang Ling, a fund manager at Shanghai River Fund Management Co. “We are overweight on consumer stocks as this industry is what the government wants to be as the major driver for growth.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 2.10, or 0.1 percent, to 3,003.95 at the 3 p.m. close, the highest since April 21. The measure dropped as much as 2 percent. Most Asian markets fell on concern higher rates will slow China’s economic growth, while the yuan slid the most in four months on speculation the rate increase will cut the need for currency gains to curb inflation.

China’s CSI 300 Index added 0.6 percent to 3,396.88, led by consumer and energy stocks. The Shanghai gauge has jumped 27 percent from its 2010 low on July 5 after lagging behind rallies in other emerging markets and as a rising yuan lured higher capital inflows. Morgan Stanley said it’s staying “bullish” on Chinese stocks after the central bank increased rates, saying that “early rate hikes very rarely conclude a market peak.”

Rate Increase

The central bank yesterday boosted the benchmark one-year lending rate to 5.56 percent from 5.31 percent. The deposit rate was increased to 2.5 percent from 2.25 percent. Officials acted before data tomorrow that may show inflation accelerated to the fastest pace in almost two years in September.

China Life, the nation’s biggest insurer, jumped 4.5 percent to 27.88 yuan. Ping An, China’s second-biggest insurer, advanced 7 percent to 66.98 yuan. China Pacific Insurance (Group) Co., the third largest, rose 6.3 percent to 28.67 yuan.

China’s life insurers will benefit from improved investment returns and gain flexibility to price products, Ivan Cheung, a Hong Kong-based analyst at Mirae Asset Securities, wrote in a report dated today.

The rate increase is a “positive signal” for the nation’s equity market as it supports a view that economic growth may have bottomed out and is set to recover, Frank Li and Peng Chen, analysts at JPMorgan in Hong Kong, said in a report. Investors should buy Chinese stocks on any “dips,” Goldman Sachs Group Inc. analysts said. Yuan-denominated assets become more attractive and the decision indicates confidence among policy makers on the strength of the economy, Citic Securities Co. said.

Consumer Stocks

China’s manufacturing expanded at the fastest pace in four months in September, while industrial output rose 13.9 percent in August, exceeding economists’ estimates. Citing the economy’s outlook, Moody’s Investors Service on Oct. 8 put the nation’s debt rating on review for a possible upgrade.

A gauge of consumer staples producers rose 3.3 percent for the biggest gain among the CSI 300’s 10 industry groups. Consumer stocks may benefit from the rate increase as investors rotate to companies whose profitability is less affected by the economy, said Zhao Zifeng, who helps oversee about $10.2 billion at China International Fund Management Co.

Moutai, China’s biggest producer of baijiu liquor by market value, advanced 2.5 percent to 167.41 yuan. Wuliangye Yibin Co., the second biggest, climbed 4.6 percent to 36.15 yuan. Tsingtao Brewery, the second-biggest by volume, rose 1.2 percent to 36.99.

Coal Stocks

Coal stocks rose as the rate increase signals the government’s confidence in the economy’s strength and the resilience of fuel demand, according to Essence Securities Co.

Datong Coal Industry Co., China’s third-largest coal company by capacity, soared by the 10 percent daily limit to 23.82 yuan. Pingdingshan Tianan Coal Mining Co., the listed unit of the fifth-largest producer of the coal, rose 6.2 percent to 24.21 yuan.

“The market’s interpretation is that the interest-rate increase indicates a strong economy, which will increase demand for coal,” said Li Dagang, an analyst at Essence Securities Co. in Shanghai. “And also some institutional investors have been adding to their allocations for coal stocks so they won’t miss the boat during this rally.”

Property Bubble

The Shanghai Composite has fallen 8.3 percent this year after the government raised bank reserve requirements three times to curb lending growth and slow record gains in property prices. Ma Jun, head of Hong Kong and China strategy at Deutsche Bank AG, said higher borrowing costs will hurt the outlook for developers and commodity producers.

Vanke, the nation’s biggest listed developer, dropped 6.1 percent to 8.92 yuan. Poly Real Estate, the second biggest, slid 7.8 percent to 13.98 yuan.

Aluminum Corp. of China Ltd., the listed unit of nation’s biggest maker of the lightweight metal and also called Chalco, retreated 3.8 percent to 12.30 yuan.

--Zhang Shidong, Richard Frost, Chua Kong Ho. Editors: Allen Wan, Reinie Booysen

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net;

To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net

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