Shanghai Stocks Extend Best Monthly Rally in 15 Months on Factory Output

China stocks rose, with the benchmark index extending a monthly rally, after manufacturing expanded at the fastest pace in six months and companies from China Shenhua Energy Co. to China Construction Bank Corp. posted higher profit.

Jiangxi Copper Co. and zinc producer Zhuzhou Smelter Group Co. paced gains by commodity producers as the Purchasing Managers’ Index beat forecasts and metal prices rallied. Shenhua Energy, the largest coal producer, added 3.4 percent and Construction Bank, the second-biggest lender, rose 2.4 percent.

“The market is only going to go up from here,” Erwin Sanft, head of China and Hong Kong research at BNP Paribas SA, said in a Bloomberg Television interview. Earnings growth has been “very encouraging,” he said.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 75.19, or 2.5 percent, to close at 3,054.02, the highest since April 16 and ending a four-day, 2.4 percent losing streak. The CSI 300 Index climbed 2.8 percent to 3,473. The ChiNext Index of start-up companies advanced 4 percent, the biggest rally since Oct. 19.

The Shanghai Composite jumped 12 percent last month, the most among the major indexes tracked globally by Bloomberg, on expectations central banks around the world will inject more cash into their economies to boost growth. The Shanghai gauge remains down 6.8 percent this year after the government raised bank reserve requirements and curbed lending growth to avert asset bubbles.

The Purchasing Managers’ Index rose to 54.7, China’s logistics federation said. The reading compared with 53.8 for both the previous month and the median forecast of 13 economists surveyed by Bloomberg News. A second PMI, from HSBC Holdings Plc and Markit Economics, jumped to 54.8 from 52.9. A reading above 50 indicates an expansion.

Commodity Producers

An index tracking materials producers gained 4.8 percent, accounting for more than a quarter of the CSI 300’s gain. Jiangxi Copper, China’s biggest producer of the metal, rallied 5.8 percent to 46.27 yuan. Zhuzhou Smelter, China’s biggest producer of refined zinc, added 6.6 percent to 16.41 yuan.

Copper rose as much as 1.1 percent in London after the manufacturing data and as investors sought alternatives to a declining dollar. Aluminum gained 0.8 percent, zinc increased 1.7 percent and lead rose 0.9 percent. Nickel climbed 0.9 percent, while tin advanced 0.7 percent.

Manufacturing growth “surprised on the upside,” Barclays economist Jian Chang said in a report to clients today.

Energy Producers

Shenhua added 3.4 percent to 29.57 yuan. The nation’s largest coal producer posted an 11 percent increase in third- quarter profit after the company increased production to benefit from higher prices. Other coal companies also advanced, helping drive the index of energy producers on the CSI 300 to a 5.3 percent gain.

Yanzhou Coal Mining Co., the listed unit of China’s fourth- biggest coal miner, jumped the daily 10 percent limit to a record 32.33 yuan. Datong Coal Industry Co., China’s third- largest coal company by capacity, increased 6.8 percent to 27 yuan.

An index of financial stocks added 1.4 percent, paring its annual loss to 17 percent. Construction Bank rose 2.4 percent to 5.16 yuan, the most in two weeks. The bank reported a 31 percent increase in third-quarter profit from a year ago, fueled by rising demand for credit and a decrease in non-performing loans.

China Minsheng Banking Corp., the nation’s first privately owned bank, advanced 1.1 percent to 5.52 yuan after saying its third-quarter profit grew 46 percent from a year earlier.

The country’s banks look “very cheap” given their profit growth, BNP’s Sanft said.

Bank Rating

Chinese company earnings are “coming in strong,” especially for the nation’s lenders, Goldman Sachs analysts led by Helen Zhu wrote in a note. They upgraded bank stocks to “overweight” from “neutral.”

The CSI 300, which represents the 300 biggest companies in China, may rise to 4,300 by next year, Goldman Sachs said. That’s 27 percent higher than the Oct. 29 closing level.

China’s central bank on Oct. 19 raised benchmark interest rates for the first time since 2007, signaling confidence in the recovery, after severing the yuan’s peg to the dollar in June. The State Council said on Oct. 27 that the economy was maintaining momentum for “stable and relatively rapid” growth.

“Economic activities remained strong, while inflation pressures continued to mount,” said Liu Li-Gang, a Hong Kong- based economist at Australia & New Zealand Banking Group Ltd. “Inflation is far from peaking, which could invite another interest-rate hike by December.”

Inflation Rate

Inflation in China may have been as high as 4 percent in October before weakening to less than 3 percent in December, the Shanghai Securities News reported today, citing Liu Yuhui, a researcher at the Chinese Academy of Social Sciences. Inflation may quicken to between 4 percent and 5 percent during much of the first half of 2011, the newspaper cited Liu as saying.

Investors should hedge against inflationary periods by buying stocks, gold and commodities, Hao Hong, Beijing-based global equity strategist for China International Capital Corp., wrote in a note to clients. High inflation periods also tend to correspond with higher median market returns, he said.

Morgan Stanley is predicting a “golden age” for Chinese consumption as incomes rise and savings rates decline. China’s consumption will reach two-thirds of the U.S. level and account for about 12 percent of the world total by 2020, Morgan Stanley economists Qing Wang and Steven Zhang wrote in a note to clients.

--Zhang Shidong. Editors: Richard Frost, Allen Wan

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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