China's Stocks Rise as Manufacturing Growth Signals Economy's Resilience

China’s stocks rose for the first time in four days as faster-than-estimated manufacturing growth signaled tightening policies haven’t curbed economic growth.

Huaneng Power International Inc. surged the most in six weeks, leading gains for electricity producers, after the Purchasing Managers’ Index rose to 55.2 in November from 54.7 in October. China Vanke Co. rose 1.1 percent as home prices rebounded. Harbin Pharmaceutical Group Co. and Shanghai Fosun Pharmaceutical (Group) Co. paced declines for health-care stocks on speculation cuts in drug prices may hurt earnings.

“The manufacturing number shows the economy is still healthy,” said Deng Changrong, a strategist at Huaxi Securities Co. in Shenzhen.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, climbed 0.1 percent to 2,823.45 at the 3 p.m. close, with 482 stocks gaining and 380 declining. The CSI 300 Index was little changed at 3,136.02.

China’s manufacturing grew at the fastest pace in seven months in November, indicating the economy can withstand higher interest rates as price pressures escalate. The PMI figure was more than the 54.8 median estimate of 14 economists surveyed by Bloomberg News.

Huaneng Power, China’s largest electricity producer, gained 1.2 percent to 5.89 yuan. China Yangtze Power Co., the nation’s biggest hydro dam operator, advanced 1.9 percent to 7.71 yuan.

Today’s manufacturing report also showed a measure of input prices climbed the most since 2008, reinforcing the case for the central bank to boost borrowing costs again after it lagged behind counterparts from Malaysia to South Korea.

Inflation Boost

“China equities correlate positively with inflation,” Erwin Sanft, head of China and Hong Kong research at BNP Paribas, said in e-mailed comments. “This relationship appears stronger than in developed markets although it has not been tested at high levels of inflation.”

Sanft recommended bank and property developers, saying large companies may benefit from further fund inflows. China posted its largest weekly inflows in the week to Nov. 24 since September, EPFR Global said in an e-mailed statement.

Vanke, the nation’s largest developer, added 1.1 percent to 8.22 yuan. Poly Real Estate Group Co., the second biggest, increased 0.9 percent to 12.23 yuan. Home prices in 100 Chinese cities rose 0.8 percent in November from a month earlier, SouFun Holdings Ltd. said in an e-mailed statement.

Industrial & Commercial Bank of China Ltd., the biggest lender, increased 2.1 percent to 4.29 yuan, the first gain in six days. China Construction Bank Corp. rose 1.7 percent to 4.70 yuan.

‘Good’ Data

Manufacturing growth may not boost stocks as the “good” economic data could persuade policymakers to further tighten monetary policy to fight inflation, Ting Lu, economist at Bank of America-Merrill Lynch, said in a report to clients.

The People’s Bank of China raised lenders’ reserve requirements for the fifth time this year on Nov. 19, a month after increasing its benchmark interest rate for the first time since 2007. Consumer prices in October were 4.4 percent higher than a year earlier. The government’s full-year inflation target is 3 percent.

China’s inflation for November likely accelerated to 4.7 percent year-on-year, which may mark the “short-term peak,” Credit Suisse Group AG said in a report today. Inflation will accelerate again to hit 6.2 percent mid-2011, with the year- average forecast at 5 percent, as food, commodity and service prices increase, economist Dong Tao said in the report.

The central bank will “probably” raise interest rates around Dec. 13, when the November inflation data are scheduled to be announced, the report said. Tao said he predicts interest rates to increase by about 150 basis points by end-2011.

Drugmakers Drop

Two-year contracts that exchange the central bank’s one- year deposit rate for a fixed payment climbed 58 basis points to 3.4 percent, the biggest monthly advance since April 2007, according to data compiled by Bloomberg. Over the past two months Standard Chartered Plc and Credit Agricole SA doubled projections for the number of increases in the deposit rate by mid-2011 to four.

A gauge tracking health-care companies on the CSI 300 extended declines, falling 1.7 percent, the most among the 10 industry groups. Harbin Pharmaceutical slid 1.8 percent to 24.47 yuan. Shanghai Fosun retreated 2.2 percent to 14.20 yuan.

China is slashing the price of drugs made by Roche Holdings AG and Bristol-Myers Squibb Co. by about a third, part of government efforts to rein in health-care costs and cool the fastest inflation in two years.

--Irene Shen. Editor: Allen Wan, Richard Frost

To contact Bloomberg News staff for this story: Irene Shen in Shanghai at +86-21-6104-3049 or ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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