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Best Rally Since February on Easing Prospects: China Overnight

Chinese equities in the U.S. extended their longest stretch of gains since February on speculation policy makers will make further cuts to banks’ reserve requirements to bolster lending and spur growth.

The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in the U.S. was little changed at 103.31 in New York on April 20, leaving its third weekly advance at 0.1 percent.

Futures on the CSI 300 Index expiring in May, the most active contract, were little changed at 2,636.80 as of 9:18 a.m. local time in Shanghai. HSBC Holdings Plc and Markit Economics are scheduled to release their preliminary manufacturing index for this month, known as the Flash PMI, at 10:30 a.m. today. It was at 48.3 in March, below the 50 threshold for expansion.

Qihoo 360 Technology Co. (QIHU), a security software developer, rose the most on the Bloomberg China index last week after issuing a filing that showed auditors had consented to its 2010 and 2011 financial statements. Huaneng Power International Inc. (600011), the listed unit of China’s largest electricity producer, traded at the highest premium over Hong Kong shares since April 12.

Banks from Mizuho Securities Asia Ltd. to Nomura Holdings Inc. are predicting China’s central bank may reduce the amount lenders have to keep in reserve at some point over the next few weeks, as the government envisions the slowest pace of economic growth since 2004 this year. The three-week rally in Chinese U.S.-listed stocks has boosted their average valuation to 19 times estimated earnings, compared with 6.6 times for an index of Russian companies traded in New York.

Cash Availability

“There are signs the two reserve bank requirement cuts since November are working, and that’s made investors optimistic another cut is coming,” Alec Young, a global equity strategist at S&P Capital IQ in New York, said by phone on April 20. “The loans really picked up a lot in March which showed it was working.”

New yuan-denominated loans issued in China in March were the most in a year.

The People’s Bank of China has been reducing reserve requirements to free up cash for lending and help insulate the world’s second-biggest economy from a global slowdown. The regulator pledged to ensure adequate availability of cash in the financial system by using tools including cuts to reserve ratios, the official Xinhua News Agency reported on April 19, citing an unidentified person at the monetary authority.

The IShares FTSE China Index Fund (FXI), the biggest Chinese exchange-traded fund in the U.S., rose 1.6 percent to $38 in New York last week. The Standard & Poor’s 500 Index (SPX) added 0.6 percent in the week to 1,378.53 as profits from companies including Microsoft Corp. (MSFT) and General Electric Co. (GE) beat median analyst estimates.

Beijing-based Qihoo surged 10 percent last week to $24.02 in New York. The American depositary receipts fell 0.3 percent on April 20, after jumping 17 percent on the previous day.

Qihoo Filing

Qihoo issued a filing on April 19 that showed auditor Deloitte Touche Tohmatsu consented to its financial statements for 2010 and 2011. Deloitte Touche Tohmatsu said the company’s “consolidated financial statements present fairly, in all material respects, the financial position” of Qihoo as of Dec. 31, 2010 and 2011, according to the filing.

Deloitte also said that Qihoo “is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting,” according to the filing.

‘Function of the Market’

“The auditors are so wary of anything based in China that they want to cover themselves, so there’s this necessity for qualified statements,” said Francis Gaskins, president of Marina Del Rey, California-based IPOdesktop, which monitors initial public offerings. “This company actually has good top- line revenue. It’s a real company with sequential increases in revenue and profit.”

Qihoo refuted in an April 3 statement allegations against it by firms including short seller Citron Research, which has disputed Qihoo’s sources of revenue in reports since November.

“Citron Research has some following but I think the stock has gone up and down mostly as a function of the market,” said Josef Schuster, founder of IPOX Schuster LLC, an investment firm based in Chicago with about $2.5 billion under management.

Melco Crown Entertainment Ltd. (6883), a Macau casino operator, climbed to an eight-month high in New York last week after Morgan Stanley said it expects the Hong Kong-based company to report a rise in first-quarter earnings. Melco is scheduled to report results on May 18.

Melco’s ADRs rose 1.8 percent on April 20 to $15.58 in New York, bringing their weekly advance to 9.1 percent. The company’s shares in Hong Kong added 8.6 percent to $HK41.80, or the equivalent of $5.39.

Consumer Model

The Shanghai Composite Index (SHCOMP) gained 1.2 percent on April 20 to 2,406.86 to post a 2 percent advance for the week. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong was little changed at 11,050.16.

Huaneng Power jumped 3.3 percent to $23.43 in the U.S., and was up 4.4 percent in the week. The ADRs traded at a 0.6 percent premium over its shares listed in Hong Kong, which gained 3.7 percent last week to $HK4.52.

“As China transitions to a more consumer model of growth, companies that depend on domestic consumption will be the big beneficiaries,” Jerome Booth, head of research at Ashmore Investment Management with $60 billion of assets in emerging markets, said in a phone interview on April 20 from London. “People are feeling more confident about Chinese growth.”

To contact the reporter on this story: Leon Lazaroff in New York at llazaroff@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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