Chinese Defense Stocks Rally on Island Dispute: Shanghai Mover

Chinese defense-related companies advanced in Shanghai after Japan’s cabinet approved the purchase of islands in the East China Sea also claimed by China.

North Navigation Control Technology Co. (600345), which makes rocket and missile control systems, surged 7.8 percent to 8.15 yuan at 11:23 a.m. local time, heading for the biggest gain since April. Xi’an Aircraft International Corp., which makes bombers, rose 1.9 percent to 7.56 yuan, extending a four-day, 5.6 percent advance. The Shanghai Composite Index (SHCOMP) fell 1 percent.

Japan’s cabinet approved today a plan for the government to buy the islands, known as Senkaku in Japanese and Diaoyu in Chinese, from a private owner for 2.05 billion yen ($26.2 million). China has denounced the move, with the state-run Xinhua News Agency quoting Premier Wen Jiabao yesterday saying the country won’t yield on sovereignty issues as he reiterated ownership of the islands.

“Investors are very imaginative and are speculating more orders for these companies,” after Japan’s action, Jiangtao Wu, an analyst at Northeast Securities Co. in Shanghai, said in Shanghai by phone.

Japan’s move defies Chinese warnings that nationalizing the islands would violate China’s sovereignty over an area with oil and gas reserves. Japanese Prime Minister Yoshihiko Noda met Chinese President Hu Jintao at a summit in Russia on Sept. 9 in a bid to address the situation as both sides seek to bolster domestic support ahead of leadership contests this year.

Any unilateral action by Japan is invalid, Chinese Foreign Ministry spokesman Hong Lei said yesterday. Japan hopes the purchase of islands doesn’t affect overall ties with its Asian neighbor, Chief Cabinet Secretary Osamu Fujimura said today.

The islands have been an irritant to China-Japan relations, highlighted by a 2010 collision between a Chinese fishing vessel and Japanese Coast Guard ships that hurt ties for months. Sovereignty over the area gives the holder control of undersea natural gas and oil fields and the two countries signed a joint development agreement in 2008 that has yet to be implemented.

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

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

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Japanese LaU.S. Says Disputed Islands Covered by Defense Treaty

The Yomiuri Shimbun via AP Images

An aerial picture from a P3C of Japan Maritime Self Defense Forces shows the Senkaku Islands, known as the Diaoyu Islands in Chinese and as Senkaku in Japanese, in the East China Sea.

An aerial picture from a P3C of Japan Maritime Self Defense Forces shows the Senkaku Islands, known as the Diaoyu Islands in Chinese and as Senkaku in Japanese, in the East China Sea. Source: The Yomiuri Shimbun via AP Images