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China Stocks to Extend Rally on ‘Turnaround,’ BNP Says

China’s stocks will extend the steepest rally in 15 months after companies reported improved cashflow in the third quarter, according to BNP Paribas.

“The market is only going to go up from here,” Erwin Sanft, head of China and Hong Kong research at BNP, said in a Bloomberg Television interview. Operating cashflows rose 45 percent in the third quarter from a year earlier, he said.

The Shanghai Composite Index climbed 12 percent in October, the second-biggest gain among 88 global stock gauges tracked by Bloomberg. Chinese stocks benefited from surging fund flows into emerging markets as companies from Agricultural Bank of China Ltd. to SAIC Motor Corp. reported higher-than-estimated earnings.

BNP joins Goldman Sachs Group Inc. in predicting Chinese stocks will extend gains. The CSI 300 Index, which represents the 300 biggest companies in China, may rise to 4,300 by next year, Goldman Sachs analysts led by Helen Zhu wrote in a note. That’s 27 percent higher than the Oct. 29 closing level.

Chinese company earnings are “coming in strong,” especially for the nation’s lenders, the analysts said. They upgraded bank stocks to “overweight” from “neutral.”

“In the third quarter we saw the big turnaround,” Sanft said. The country’s banks look “very cheap” given their profit growth, he said.

Agricultural Bank of China and Bank of China Ltd. reported third-quarter profit that beat analysts’ estimates as the nation’s economic growth helped bolster credit demand and curb defaults.

Factory Output

China’s manufacturing expanded at the fastest pace in six months in October, the logistics federation said today in an e-mailed statement. The Purchasing Managers’ Index rose to 54.7, compared with 53.8 for both the previous month and the median forecast of 13 economists surveyed by Bloomberg News. A reading above 50 indicates an expansion.

The 915-stock Shanghai measure, which tracks companies traded on the bigger of China’s two exchanges, had its best monthly showing since July 2009, when government spending and record bank lending drove the index to a 15 percent gain. The MSCI China Index, which tracks mostly Hong Kong-traded Chinese companies, has advanced 7.5 percent this year.

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