China Stock Index Halts Nine-Day Losing Streak as Banks Rebound

China’s benchmark stock index rose, led by banks and drugmakers, after a nine-day losing streak for the benchmark index drove valuations down to a four-month low and technical indicators signaled a rebound.

China Construction Bank Corp. (601939) and China Citic Bank Corp. rebounded at least 5 percent after plunging in late trade on Dec. 20. The Shanghai Stock Exchange said “abnormal trading” was caused by foreign investors adjusting their positions to track index changes. Guizhou Bailing Group Pharmaceutical Co. paced gains for drug stocks on expectations the outbreak of the bird flu will boost medical expenditures. Tianjin Zhonghuan Semiconductor Co. tumbled to a seven-month low after receiving a warning from the regulator to disclose information.

The Shanghai Composite Index (SHCOMP) rose 0.2 percent to 2,089.71 at the close. The measure trades at 8.1 times projected profit for the next 12 months, the lowest level since July 31. The 14-day relative strength measure was at 27.4 on Dec. 20. Readings below 30 indicate it may be poised to rise.

“A rebound is imminent as valuations and technical indicators are at pretty low levels,” said Wu Kan, a money manager at Dragon Life, which oversees about $3.3 billion. “The focus is still on money-market rates. Unless they retreat from the current high levels, the rebound may be short-lived.”

The CSI 300 Index gained 0.3 percent to 2,284.60. The Hang Seng China Enterprises Index (HSCEI) slipped 0.1 percent. The Bloomberg China-US Equity Index fell 0.2 percent on Dec. 20.

The seven-day repurchase rate, a gauge of liquidity in the financial system, jumped 73 basis points to 8.94 percent as of 3:22 p.m., the highest since June’s funding squeeze drove the rate to a record, according to fixings by the National Interbank Funding Center. It surged 328 basis points last week.

Banks Rally

“Markets tend to overreact to these spikes in rates, similar to what we saw in June,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis, which oversees $700 million in assets, said in an e-mail Dec. 20. “They will continue to inject funds to bring things down to healthy levels. You have to remember that the PBOC controls all this.”

Borrowing costs in China climbed in recent weeks as the government shifted toward allowing market-determined interest rates. The People’s Bank of China conducted more than 300 billion yuan ($49 billion) of short-term liquidity operations over three days, it said Dec. 20 on its microblog.

Construction Bank, the country’s second-largest bank, rallied 5.3 percent to 4.17 yuan after tumbling 6.2 percent on Dec. 20. Citic Bank jumped 5.6 percent to 3.78 yuan. The stock slumped 8.7 percent in the previous session.

Bird Flu

“Abnormal trading” in some Chinese stocks on Dec. 20 was due to position adjustments by some qualified foreign institutional investors as they tracked stock indexes, the Shanghai Stock Exchange said in a statement on its microblog yesterday.

Some foreign index compilers adjusted component stocks and their weightings on the Shanghai and Shenzhen stock exchanges, which were tracked by QFIIs, the statement said, without identifying any index compilers or QFII.

A measure of pharmaceutical stocks rose 2.9 percent, the biggest gain among the CSI 300’s industry groups. Guizhou Bailing surged 10 percent to 31.79 yuan. Hualan Biological Engineering Inc. (002007) advanced 6.7 percent to 29.52 yuan.

China sealed off a farm in the northern province of Hebei after an outbreak of bird flu, the official Xinhua News Agency reported, citing the agriculture ministry. About 125,700 chickens were culled in areas near the farm to prevent the spread of the disease, it said.

Hepatitis Vaccine

Beijing Tiantan Biological Products Co. (600161) jumped by the 10 percent daily cap to 25.16 yuan. Guangdong province purchased its Hepatitis B vaccine after banning another producer’s vaccine that may have killed infants, Shanghai Great Wisdom Information Technology Co. reported on its website, citing an unidentified person from the local disease control and prevention center.

Tianjin Zhonghuan declined 3.7 percent to 16.75 yuan, the lowest close since May 22. The company said it received a warning letter from the China Securities Regulatory Commission after shareholder Tianjin Pharmaceuticals Group didn’t disclose information on a timely basis and failed to reduce its stake.

Two of China’s three biggest securities firms predict the central bank will refrain from using open-market operations to inject funds this week as policy makers seek to rein in debt and contain inflation.

Citic Securities Co., the largest brokerage by assets, said government spending will ease the cash squeeze. Guotai Junan Securities Co., ranked third, said the supply of funds directly to banks alleviates the need for auctions of reverse-repurchase agreements. The monetary authority has suspended offerings of the latter for almost three weeks, the longest pause since July.

Trading volumes in the Shanghai Composite were 38 percent lower than the 30-day average today, according to data compiled by Bloomberg.

--Zhang Shidong. Editors: Allen Wan, Phani Varahabhotla

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

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