Biggest Fund Sees Economy Reigniting China Stock Advance

Chinese stocks will resume this year’s rally as the government works to shore up the nation’s economic recovery, according to China Asset Management Co., the biggest fund manager.

The Shanghai Composite Index (SHCOMP) dropped 1.4 percent yesterday, extending its February drop to 3.9 percent, after back-to-back gains in January and December. China’s new leaders are mulling plans to revamp the central government this week to bolster the economy as it emerges from a seven-quarter slowdown, the official Xinhua News Agency reported Feb. 23. Communist Party chief Xi Jinping is projected to become president during the broadest reshuffle in five years at the National People’s Congress starting March 5.

Gains this year in Chinese A shares, stock traded in Shanghai and the southern city of Shenzhen, “didn’t fully reflect the gradual economic recovery this year,” David Lai, a portfolio manager at the Hong Kong unit of China Asset Management, said by phone Feb. 25. “More projects or plans will be rolled out to support short-term growth after the government reshuffle next month.”

China Asset Management is the country’s biggest fund manager with 246 billion yuan ($39 billion) of assets, according to fund tracker Howbuy. Lai manages the ChinaAMC CSI 300 Index ETF, a Hong Kong-listed exchange-traded fund that tracks the 300 biggest publicly traded companies in Shanghai and Shenzhen.

Economic Rebound

The ETF has returned 1.8 percent in 2013, compared with a 5.8 percent decline in the iShares FTSE China 25 Index Fund, the largest Chinese ETF in the U.S. The Shanghai A-Share Stock Price Index (SHASHR) has returned 1.9 percent, while the Shenzhen A-Share Stock Price Index (SZASHR) gained 7.3 percent. The Shanghai Composite rose 0.9 percent at the close today, adding to an 18 percent gain since Dec. 3.

China’s economy, the world’s second largest, grew 7.8 percent last year, the least since 1999. Economic growth accelerated for the first quarter since 2009 in the three months to Dec. 31. The Shanghai Composite is up 1.9 percent this year, after surging 20 percent in December and January. The gauge added 3.2 percent in 2012, the smallest advance of benchmark indexes in the biggest emerging markets.

Gross domestic product will rise about 8 percent this year as policy makers work to support private enterprise by opening up highly regulated industries including telecommunications and railways, Lai said. Inflation and rising property prices pose the biggest risk to stocks this year, he said.

Expectations ’High’

Investors in Chinese stock markets are too bullish given the prospect for policy disappointment at this year’s National People’s Congress and the rally for equities since the end of last year has run its course, Hao Hong, head of China research at Bank of Communications Co. in Hong Kong, wrote in a note.

The focus at the NPC will be on the leadership transition and not on fundamental reforms, Hong said. China is still early in the economic recovery cycle and the stock rally may have been a “little long in its tooth,” he wrote in a note today.

Premier Wen Jiabao called for home-purchase restrictions in cities with “excessively fast” price gains last week, as government data released Feb. 22 showed new home prices climbed in January in 53 of the 70 tracked cities. The government may tighten monetary policy because of excess cash on the market and the situation with property prices, China Securities Journal reported in a front-page commentary Feb. 26.

“I don’t expect the government to be forced to do any drastic change in the short term,” Lai said. The Chinese economy “seems that it’s still well on track,” he said.

The ChinaAMC CSI 300 Index ETF-JDR, tracking the CSI 300 Index, and the CSOP FTSE China A50 ETF, which tracks 50 largest companies listed in Shanghai, will begin trading in Tokyo today. They are the first RQFII A-share ETFs to list in Japan and the first-ever foreign ETFs. The RQFII program allows offshore yuan in Hong Kong to be invested in mainland Chinese stocks and bonds.

To contact the reporter on 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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