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China Stocks Rise as Slower Economy Spurs Easier Policy Outlook

China’s stocks rose, extending the best monthly gain in a year, on the prospect the government will reverse policies aimed at slowing the world’s third-biggest economy after manufacturing expanded the least in 17 months.

China Shenhua Energy Co. and China Coal Energy Co. paced gains among coal producers after a large coal field was found in northeastern China. Beijing Yanjing Brewery Co. led advances among consumer stocks after first-half earnings increased 25 percent. Suning Appliance Co., China’s biggest home appliance retailer by market value, climbed to the highest in more than six months after reporting higher first-half profit.

“The market has reached a consensus view that the government will ease current measures to rein in economic growth as data show growth is already slowing down,” said Wang Zheng, a fund manager at Jingxi Investment Management Co. in Shanghai.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 35.01, or 1.3 percent, to 2,672.52 at the 3 p.m. close, the highest since May 24. The CSI 300 Index rose 1.7 percent to 2,917.27, led by consumer and health-care companies.

The Shanghai index rallied 10 percent last month, the most since July last year when it gained 15 percent, on expectations the government will ease property curbs and allow more lending to offset a slowdown in economic growth. The measure is still down 18 percent in 2010 on concern measures to control real- estate speculation and accelerating inflation will damp earnings.

Manufacturing Slowdown

The Purchasing Managers’ Index fell to 51.2 in July from 52.1 in June, the Federation of Logistics and Purchasing said on its website yesterday. That was the lowest since China’s manufacturing stopped contracting in March 2009 and was less than the median forecast of 51.4 in a Bloomberg News survey of 15 economists. A reading above 50 shows an expansion.

Another purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics fell to 49.4 in July from 50.4 a month earlier, the first contraction in 16 months.

“The government’s tightening policies have already achieved the desired effect,” said Zhang Kun, a strategist at Guotai Junan Securities Co. in Shanghai. “There won’t be any intensified measures going forward. The market can breathe a sigh of relief.’

China’s full-year economic growth may be about 9.5 percent, State Council researcher Zhang Liqun said in the statement released yesterday with the official manufacturing PMI figure for July. The economy expanded 10.3 percent in the second quarter, slowing from an 11.9 percent growth a quarter earlier.

‘Visible Softening’

Morgan Stanley said in a report it expects a “visible softening in policy tone” in the third quarter and the government to introduce measures to bolster economic growth in the fourth quarter.

China has increased banks’ reserve requirements three times this year and set a lending target of 7.5 trillion yuan for lenders in order to curb asset bubbles in the nation’s economy.

Shenhua, the nation’s largest coal producer, rose 1.4 percent to 24.07 yuan. China Coal, the second biggest, gained 1.8 percent to 10.03 yuan. Datong Coal Industry Co., the third largest, added 2 percent to 16.44 yuan.

China discovered more than 1 billion tons of coal reserves in the northeastern Liaoning Province, the People’s Daily online reported yesterday, citing a local government release. It is the largest coal field found in northeastern regions in almost two decades, the newspaper said.

A gauge of consumer discretionary stocks gained 2.1 percent in the CSI 300, while a measure of consumer staples rose 3.2 percent.

Rising prices may boost the earnings of makers of consumer goods. Inflation, which eased to 2.9 percent in June, may climb above 3 percent in the next few months before falling at the end of this year, UBS economist Wang Tao wrote in a report last week.

Beverage Makers

Yanjing Brewery, China’s third-biggest brewer, rose 5 percent to 21.58 yuan after the company said net income for the first half climbed 25 percent from a year earlier.

Kweichow Moutai Co., the biggest producer of baijiu liquor by market value, rose 3.5 percent to 143.55 yuan. YOUR-MART Co., an operator of department stores, gained 2.4 percent to 23.38 yuan, the highest close since the stock began trading on July 17.

Suning Appliance, China’s biggest home appliance retailer by market value, gained 2.5 percent to 12.81 yuan, the highest since Jan. 19, after saying first-half profit rose 56 percent from a year earlier.

China-listed companies posted a 50 percent gain in net income on average in the first half, the Shanghai Securities News reported, citing 264 companies that have released earnings results as of July 31.

Wave of Gains

The Shanghai Composite may be set for another “wave” of gains after completing a so-called correction that lasted for almost a year, according to Elliott Wave International Inc.

The Shanghai index capped a three-wave decline in early July and has turned higher near the 61.8 percent retracement of its 2008 to 2009 rally according to the Fibonacci sequence, the research company said. That also coincided with the lower line of the trend channel that had contained the decline from its August 2009 high.

China’s stocks may outperform global markets in the next three months as valuations are “very cheap,” liquidity improves and the threat of further policy tightening recedes, according to Nomura Holdings Inc.’s equity strategist Sean Darby.

Essence Securities Co., ranked second for strategy research by New Fortune magazine last year, said it’s turning negative on the nation’s shares because of inflation concerns.

The following companies were among the most active in China’s markets. Stock symbols are in brackets after companies’ names.

Dalian Yi Qiao Marine Seeds Co. (002447 CH) surged by the 10 percent daily limit to 49.61 yuan after saying first-half profit rose 17 percent from a year ago.

Shanghai Qiangsheng Holding Co. (600662 CH) gained 8.8 percent to 7.69 yuan. The company, which resumed trading after a two-month suspension, said it plans to sell about 245 million shares in a private placement at 7.03 yuan each. It’s raising funds to buy assets from its two largest shareholders.

Shenzhen Airport Co. (000089 CH) added 2.7 percent to 6.03 yuan. The company said first-half profit rose 29 percent from year-earlier levels. Separately, the stock was raised to “overweight” from “equal-weight” by Morgan Stanley analysts led by Edward Xu.

Tangshan Sanyou Chemical Industries Co. (600409 CH) jumped by the 10 percent daily cap to 6.31 yuan. The company said it will sell 121 million shares to its parent and an affiliate to take control of two chemical fiber units valued at a combined 720.5 million yuan, according to a stock exchange filing. The stock resumed trading today after a one-month suspension.

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