Signs of Revival Spur Longest Rally Since April: China Overnight
Stock Chart for April (APR)
The benchmark index of Chinese stocks traded in New York climbed for a fourth week to cap the longest stretch of gains since April (APR) on signs Asia’s largest economy is picking up after seven quarters of slowing growth.
The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese companies in the U.S. added 1.9 percent last week, as software developer AsiaInfo-Linkage Inc. (ASIA) and circuit maker Semiconductor Manufacturing International Corp. (981) drove gains. The iShares FTSE China 25 Index Fund, the biggest Chinese exchange- traded fund in the U.S., added 2.1 percent in the week, reaching a five-month high on Oct. 18.
Reports showed last week that industrial production, retail sales and fixed-asset investment in China accelerated in September, signaling a recovery in the world’s second-largest economy may be gaining traction. The economic situation in China is “relatively good” and expansion in gross domestic product has started to stabilize, Premier Wen Jiabao said on Oct. 17, according to the official Xinhua News Agency.
“The economy is bottoming out,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc. said in a phone interview from Lisle, Illinois on Oct. 19. “As long as there are positive changes in terms of the structural shift of the economy, stocks can do well.”
The Bloomberg China-US index rose to 95.54 last week in its biggest advance in a month. The Shanghai Composite Index (SHCOMP) of domestic shares added 1.1 percent. The iShares China ETF, which tracks the 25 largest Chinese companies listed in Hong Kong, advanced to $37.13, gaining for a third week.
Option traders are the least bearish on the China ETF since July 2011. Puts with an exercise price 10 percent below that for the ETF cost 3.6 percentage points more on Oct. 18 than calls betting on a 10 percent increase, the most in more than a year, according to three-month data compiled by Bloomberg.
AsiaInfo-Linkage, a Beijing-based developer of software for the telecommunications industry, gained 7.8 percent to $10.69 in New York for its first weekly advance in a month. American depositary receipts of Semiconductor Manufacturing (SMI), a computer chipmaker based in Shanghai, jumped 7.1 percent to $1.96.
China’s GDP rose 2.2 percent in the third quarter from the previous period, the fastest pace in a year, the nation’s statistics bureau reported on Oct. 17. Industrial production increased 9.2 percent in September from a year earlier, rebounding from the slowest pace of growth in three years posted in August. Retail sales rose 14.2 percent in September from a year earlier, the most since March.
This Week’s Earnings
China Mobile Ltd. (941), the world’s biggest phone company by subscribers, will probably report on Oct. 22 that third-quarter profit dropped to 1.51 yuan (24 U.S. cents) a share, from 1.74 yuan in the previous period, according to the average of three analysts’ forecasts compiled by Bloomberg. The ADRs fell 0.4 percent last week to $54.09.
Yanzhou Coal Mining Co. (YZC), China’s fourth-largest coal miner, will report Oct. 26 that net income declined to 0.16 yuan a share in the third quarter, from 0.33 yuan, according to the average of three analysts’ estimates collated by Bloomberg. The ADRs retreated 1.2 percent to $16.05 last week.
John-Paul Smith, Deutsche Bank AG’s emerging-market strategist, said he remains bearish on Chinese stocks because a glut in production capacity will squeeze corporate earnings.
“The underlying situation in terms of cash flow is pretty negative,” said Smith by phone from London. “There’s excess capacity across the industrial sectors.”
The Bloomberg China-US gauge has increased 10 percent over the past three months, compared with gains of 4.1 percent in the Standard & Poor’s 500 Index and 6.9 percent in the MSCI Emerging Markets Index.
The put-to-call ratio of the China ETF reached a seven- month high of 10.8 percentage points in May on concern the European debt crisis will erode China’s exports and after government measures curbed growth in the housing market. The so- called skew retreated to 4.1 percentage points on Oct. 19.
“The sentiment on China has really changed,” Kelvin Tay, the Singapore-based chief investment officer for the southern Asia-Pacific region at the wealth management unit of UBS AG, said in an interview on Bloomberg Television on Oct. 19. “The numbers are pointing to the fact that the economy has actually bottomed in the third quarter. China is likely to be the best performing market in the coming months.”
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