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China Inflation Peaking to Bolster Stocks, JPMorgan Asset Says

Chinese government measures to curb property-price gains and tame inflation are “at or close to the peak,” bolstering the outlook for stocks, according to JPMorgan Asset Management.

China’s inflation will ease as the measures have been “highly effective,” said Howard Wang, the Hong Kong-based head of the Greater China team at the JPMorgan unit, which oversees $14 billion of assets in China, Hong Kong and Taiwan. Wang said he is adding some “very cheap’” property developers, materials companies and technology shares to his holdings. His Greater China Fund has returned 22 percent over the past year, beating 86 percent of rivals, according to data compiled by Bloomberg.

“We think inflation is peaking now and that it will ease off,” Wang said in an e-mailed response to questions. “All things equal, that should make a better environment for Chinese equities.”

The Hang Seng China Enterprises Index tracking Chinese stocks traded in Hong Kong has dropped 3.1 percent this year to yesterday, lagging behind the 1.9 percent decline for the MSCI Emerging-Markets Index, on concern measures to curb inflation will slow economic growth and hurt corporate earnings. China’s consumer prices jumped to a three-year high of 6.4 percent last month on rising food costs. The central bank has boosted interest rates five times and lenders’ reserve-requirement ratio 12 times since the start of 2010.

‘Long’ Property

China’s inflation may peak in July as summer harvests boost food stockpiles and money supply growth stabilizes, Chen Dongqi, deputy head of the National Development and Reform Commission’s macroeconomic research institute, was quoted as saying by the 21st Century Business Herald on July 12. Inflation in developing nations may stop rising next month, allowing the central bank to pause interest rate increases, Sakthi Siva, Credit Suisse Group AG’s Asian equity strategist, said in an interview July 8.

Wang said he’s “long” Chinese property stocks, without naming any companies.

“The government’s tightening policies are real and they are highly effective,” Wang said. “However, the policies do not exert an equal effect on all companies in this group and valuations are, as a rule, very cheap and based on beatable earnings estimates.”

The Hang Seng China Enterprises Index trades at 10 times estimated earnings, compared with 10.9 for the MSCI emerging- markets gauge and 12.8 for China’s Shanghai Composite Index, according to data compiled by Bloomberg.

Property Shares

China’s cabinet said last week it will expand measures to rein in residential prices to smaller cities after limiting home purchases in metropolitan areas including Beijing and Shanghai. Beijing new home prices rose 2.2 percent last month from a year earlier, while in Shanghai they climbed 2.2 percent, the statistics bureau said on its website July 17.

A gauge of property companies in the Shanghai Composite Index has advanced 7.5 percent this year, the best performer among five industry groups. Even with the rally, the gauge trades at 12 times estimated earnings, compared with a four-year average of 23.4, Bloomberg data showed.

The Greater China fund’s largest holding at the end of May was China Construction Bank Corp. (939), data compiled by Bloomberg shows. Chinese bank stocks are likely to track gains in broader indexes amid concerns about fundraisings to strengthen balance sheets, Wang said. China Merchants Bank Co., the country’s sixth-largest lender, announced plans this week to raise as much as 35 billion yuan ($5.4 billion) in a rights offer in China and Hong Kong.

Construction Bank

“Bank fundamentals are solid,” he said. “We temper our positive view with two caveats: banks are cheap everywhere in the world and, closer to home, there are plenty of opportunities to buy these stocks via placements. Performance is likely to look index-like in the near term.”

China Construction Bank’s Hong Kong-traded shares have dropped 13 percent in 2011, driving down the value of the country’s second-biggest lender to 1.69 times net value of assets, compared with the four-year average of 2.29, data compiled by Bloomberg show.

“We are at or close to the peak in terms of government tightening intensity so things should only get better from here,” Wang said.

--Allen Wan. Editor: Richard Frost, Darren Boey

To contact the reporter on this story: Allen Wan at awan3@bloomberg.net

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

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