China’s Stocks Rally From Six-Month Low Amid Policy Speculation

China’s stocks rallied from a six- month low as speculation the government will boost investments to bolster the economy overshadowed signs slowing growth is damping corporate earnings.

China Railway Erju Co. (600528) and Anhui Conch Cement Co. led advances among infrastructure-related stocks after Premier Wen Jiabao said promoting “reasonable” growth in investment is important. Health-care and consumer-staples stocks gained the most among the CSI 300 Index’s industry groups as investors bought shares of companies least tied to economic growth. China Southern Airlines Co. (600029) lost 2.2 percent after saying first-half profit may have dropped more than 50 percent.

“The earnings outlook is pretty bleak and it looks like there’s more room to further cut estimates,” Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co., said by phone. “But we shouldn’t be too pessimistic at this level as the government may release pro-growth measures.”

The Shanghai Composite Index (SHCOMP) advanced 0.5 percent to 2,175.38 at the close, snapping a two-day, 2.7 percent drop. Seven stocks gained for every two that fell in the gauge, which turned between gains and losses at least 11 times. The CSI 300 Index (SHSZ300) climbed 0.8 percent to 2,425.57. The Bloomberg China-US 55 Index (CH55BN), which tracks the most-traded U.S.-listed Chinese companies, lost 1.8 percent yesterday.

Thirty-day volatility in the Shanghai index was at 15.8 today, compared with this year’s average of 18.1. About 5.9 billion shares changed hands in the gauge yesterday, 31 percent lower than the daily average this year.

Lower Valuation

The Shanghai Composite has fallen 1.1 percent this year, reversing a gain of as much as 12 percent, and closed yesterday at the lowest level since Jan. 6 amid concern the government isn’t doing enough to stem an economic slowdown. It trades at 9.6 times estimated profit, compared with the 17.6 average since Bloomberg began compiling the data in 2006.

The index’s 14-day relative strength index, which measures how rapidly prices have advanced or dropped during a specified time period, was at 30.3 yesterday. Readings below 30 indicate it may be poised to rise.

China Railway Erju, a rail construction company, jumped 5.9 percent to 6.50 yuan, its biggest gain since May 28. Anhui Conch, China’s biggest cement maker, climbed 2.8 percent to 14.53 yuan. Citic Heavy Industries Co. (601608), the heavy machinery unit of China’s largest conglomerate, surged 6 percent to 4.44 yuan, the biggest advance since its listing on the Shanghai Stock Exchange on July 6.

Boost Investment

Premier Wen said the country needs to maintain “a certain amount” of economic growth, according to a State Council statement posted on the central government’s website yesterday. He called for private investments in railway, public utilities, energy and telecommunication companies, health care and education.

China’s policy is likely to focus on investment, Deutsche Bank AG said in a note yesterday. The downside risk to the nation’s economy is a sharp deceleration in infrastructure fixed-asset investment rather than export growth, Jun Ma, chief economist Deutsche Bank, wrote in the note.

The People’s Bank of China may release June figures for new lending and money supply as early as today. New loans rose to 880 billion yuan ($138.3 billion) from 793.2 billion yuan a month earlier, while the broader money supply rebounded to 13.5 percent from 13.2 percent in May, according to the median estimate of Bloomberg surveys.

Slowing Trade

A statistics bureau report on July 13 is expected to show China’s economy expanded 7.7 percent in the second quarter, the slowest pace in three years, according to the median estimate of 35 economists surveyed by Bloomberg.

Data yesterday showed Chinese imports in June grew 6.3 percent, below the 11 percent median estimate in a Bloomberg News survey of 32 economists. Export growth also slowed from May, putting the government further at risk of missing its goal of 10 percent growth in trade this year. The government said on July 9 the annual inflation rate fell to 2.2 percent in June, the slowest pace in more than two years.

Gauges tracking pharmaceutical and consumer-staples stocks climbed 2.9 percent and 2.3 percent respectively today, the most among the CSI 300’s 10 industry groups.

Yunnan Baiyao Group Co., a manufacturer of traditional Chinese medicines, rose 5.3 percent to 62.77 yuan. Kweichow Moutai Co. (600519), China’s biggest producer of baijiu liquor by market value, added 3 percent to 258.01 yuan.

Net incomes for consumer-goods companies in the CSI 300 rose 26 percent from a year earlier in the first quarter, compared with a 6.7 percent gain in earnings for the all 300 companies in the CSI 300 in the period, according to data compiled by Bloomberg.

Earnings Concern

Publicly traded Chinese companies release their interim earnings reports in July and August. The companies in the Shanghai and Shenzhen stock exchanges are expected to post a 4.2 percent decline in second-quarter profit, according to Haitong Securities Co.

China Southern, the nation’s biggest carrier by fleet size, lost 2.2 percent to 4.54 yuan. First-half profit probably dropped from a year earlier because of slowing economic growth and higher jet-fuel prices, the carrier said in a statement yesterday. The Chinese currency’s decline against the U.S. dollar also caused foreign-exchange losses, it said.

Luolai Home Textile Co. (002293), China’s biggest manufacturer of home textile products, slumped by the 10 percent daily limit to 64.70 yuan, its biggest decline since its first trading day on the Shenzhen Stock Exchange in September 2009.

First-half profit probably dropped as much as 30 percent from a year earlier because of lower sales and increased costs, the company said in a statement yesterday. That compared with an April estimate of an increase of as much as 30 percent.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., slid 1.9 percent to $32.43 yesterday. The ETF dropped for a fourth day, the longest period of losses since May.

--Zhang Shidong. Editors: Darren Boey, Richard Frost

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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