China’s Stocks Rise, Capping Second Weekly Gain, on Bank Lending Optimism

China’s stocks rose, sending the benchmark index to its first back-to-back weekly gain in two months, on speculation the government will ease lending curbs to bolster economic growth.

Huaxia Bank Co. (600015) and China Everbright Bank Co. advanced at least 2 percent after saying profit climbed last year. Kweichow Moutai Co. and Henan Shuanghui Investment & Development Co., the nation’s biggest producer of baijiu liquor and meat processor, paced gains among consumer stocks on speculation demand during the Lunar New Year holidays will boost sales. China’s markets will be shut next week for the festival.

“The rally is supported by expectations that more liquidity will be released,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million.

The Shanghai Composite Index (SHCOMP) climbed 23.04 points, or 1 percent, to 2,319.12 at the close. The CSI 300 Index added 1.5 percent to 2,504.09. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, lost less than 0.1 percent in New York yesterday.

Ten-day volatility on the Shanghai Composite increased yesterday to the highest level since November 2010, after the gauge rose or fell by more than 1.3 percent on eight of the 12 trading days this year.

The Shanghai index gained 3.3 percent this week on speculation slowing growth will prompt the central bank to relax monetary policies and the government will take measures to support stocks. That’s taken this year’s gain to 5.4 percent.

Pension Funds

China’s State Council is reviewing a proposal to allow local pension funds to invest 10 percent to 20 percent of their assets in stocks, Reuters said today, citing an unidentified person familiar with the matter. That would amount to 180 billion yuan ($28 billion) to 360 billion yuan, Reuters said.

China’s manufacturing may contract for a third month, boosting the case for the government to further loosen credit control. The preliminary reading of 48.8 for a purchasing managers’ index released by HSBC Holdings Plc and Markit Economics today compares with a final number of 48.7 for December. The dividing line between contraction and expansion is 50.

Huaxia Bank, partly owned by Deutsche Bank AG, climbed 3 percent to 12.12 yuan. China Minsheng Banking Corp., the nation’s first privately owned bank, added 1.4 percent to 6.53 yuan. Both lenders said profits may have increased more than 50 percent last year. Everbright Bank gained 2 percent to 3.04 yuan after it said in a preliminary earning statement profit rose 41 percent in 2011.

Earings Season

Chinese listed companies have started to announce annual earnings reports and will finish before the end of April. Thirty-five companies in the Shanghai Composite have released annual profits for 2011 so far, with an average gain of 19 percent and trailing estimates by 2.2 percent, according to data compiled by Bloomberg. That compared with an increase of 38 percent in the previous year.

Chinese bank lending in the first quarter may exceed the 2.26 trillion yuan a year earlier, the Shanghai Securities News reports today, citing an unidentified person. Banks will increase loans to small companies and the agricultural industry, according to the newspaper.

China’s benchmark money-market rate fell by the most in 11 months after the central bank injected funds before the Lunar New Year holiday and on speculation a cut in banks’ reserve- requirement ratios is imminent.

Reverse Repo

The People’s Bank of China injected 353 billion yuan using 14-day reverse-repurchase contracts this week, the most since Bloomberg began collecting the data in early 2008. The seven-day repurchase rate, a gauge of funding availability in the financial system, rose to the highest level in almost seven months this week as cash demand surged ahead of the weeklong holiday.

The reverse repo conducted this week is “an amount close to one reserve-ratio cut,” Ju Wang, a strategist at Barclays Capital in Singapore, wrote in a report today. “Liquidity conditions improved and repo rates fell. We continue to believe a reserve-requirement ratio cut is around the corner and is needed to support credit growth.”

China this week reported the weakest quarterly expansion in gross domestic product in 10 periods, while foreign direct investment fell the most in more than two years in December.

Moutai gained 2.9 percent to 185.97 yuan, the highest close in a week. Henan Shuanghui climbed 2.8 percent to 67 yuan. Zhengzhou Sanquan Foods Co. (002216), China’s biggest listed frozen food producer, jumped 7.3 percent to 25.91 yuan.

Holiday Shopping

“The Spring Festival effect is the main reason for consumer stocks’ rally,” said Dazhong Insurance’s Wu. “They are good investment options with relative stable earnings growth.”

The one-week holiday, which begins Jan. 23, generated $64 billion in retail sales last year, according to government statistics. Retail sales rose 18.1 percent in December from a year earlier, the statistics bureau said this week. That compared with the median 17.2 percent estimate of 21 economists surveyed by Bloomberg News, and the 17.3 percent growth in November.

The Shanghai Composite trades at 9.5 times estimated earnings, near the record low of 8.9 times reached on Jan. 6, according to weekly data compiled by Bloomberg. It was the worst performer among the world’s 15 biggest markets in the two years through 2011 with a 33 percent drop.

The yuan dropped 0.23 percent this week, heading for the second weekly decline of the year, on speculation China will limit appreciation to protect exporters as global economic growth slows.

--Zhang Shidong. Editors: Richard Frost, Shiyin Chen

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

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

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