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China Stock Index Advances on Muni Bond, Environmental Plans

China’s benchmark stock index rose on speculation the nation is increasing measures to spur the economy by allowing local governments to issue bonds and boosting investment for environmental protection.

China Minsheng Banking Corp. and Huaxia Bank Co. gained more than 2 percent after the finance ministry said cities such as Shanghai and Shenzhen will be able to sell debt themselves instead of going through the central government. Tianjin Capital Environmental Protection Group Co. surged 4.4 percent. PetroChina Co., the nation’s largest oil producer, slid to a one-month low after media reports said the company may have a 2011 refining loss of over 50 billion yuan ($7.8 billion).

“Allowing local governments to issue bonds is regarded as a signal of loosening fiscal policy,” said Mei Luwu, a fund manager at Lion Fund Management Co. in Shenzhen. “The market will be volatile as investors weigh the economic slowdown and its effect on companies’ earnings.”

The Shanghai Composite Index climbed 4 points, or 0.2 percent, to 2,335.37 at 10:37 a.m., even as 456 stocks dropped and 411 gained. The CSI 300 Index added 0.5 percent to 2,533.61.

Huaxia Bank, partly owned by Deutsche Bank AG, led gains for lenders, adding 2.6 percent to 11.15 yuan. China Minsheng climbed 2.8 percent to 5.89 yuan.

The cities of Shanghai and Shenzhen, and the Zhejiang and Guangdong provinces will be able to sell debt themselves instead of going through the central government, according to a Finance Ministry statement yesterday.

“This sends a strong signal that the central government is determined to find a solution to resolve local debt problems,” said Qu Hongbin, chief economist for Greater China at HSBC Holdings Plc in Hong Kong. “It also opens a door for widening long-term financing channels for local governments.”

Environmental Stocks

Tianjin Capital Environmental jumped 4.4 percent to 5.48 yuan. Sound Environmental Resources Co. added 2.2 percent to 25.09 yuan. China will push forward with environmental tax reform and the State Council is studying the introduction of an environmental protection tax.

The country plans to raise investment in environmental protection and include it in the annual fiscal budgets for all levels of government, according to a statement posted on the government’s website yesterday. The government will also support bond issues for companies undertaking environmental projects and provide tax breaks.

The Shanghai gauge has lost 4 percent this week after some reports showed the Chinese economy is decelerating. The nation’s gross domestic product grew at 9.1 percent in the third quarter, the slowest pace in two years, while foreign direct investment rose 7.9 percent in September at the slowest pace in three months. Industrial production and retail sales rose at a faster pace last month.

Economic Outlook

China’s economy may continue to slow in the last quarter of the year and in the first half of next, National Business Daily cited Chen Dongqi, deputy director of the National Development and Reform Commission’s Chinese Academy of Macroeconomic Research, as saying at a forum. The country’s consumer price index this year won’t likely fall below 5 percent, Chen said, according to the newspaper.

Investors should prepare for hard landing in China, said Albert Edwards, global strategist at Societe Generale SA, in a report yesterday. Chinese authorities’ efforts to deflate property prices may lead to a crash in the overall economy as it did in U.S. and the cessation of foreign exchange reserve growth in the third quarter may be the “straw to break the panda’s back,” he wrote.

Record-Low Valuations

The Shanghai index has plunged 17 percent this year, driving down estimated price earnings to a record low of 10.8 times yesterday, according to data compiled by Bloomberg. China has raised interest rates three times in 2011 and ordered lenders to set aside a bigger portion of their deposits to curb inflation that’s near a three-year high.

Global stocks rebounded as two people familiar with the matter said Europe may combine the temporary and permanent rescue funds to unleash as much as 940 billion euros to fight the crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy said in a joint statement they want euro-region leaders to agree on a “comprehensive and ambitious” plan as the EU plans another debt summit on Oct. 26.

PetroChina slid 1.8 percent to 9.57 yuan as the shares resumed trading after being suspended yesterday. PetroChina’s annual resource tax payments may rise to 29 billion yuan, Xinhua News Agency reported yesterday, without saying where it got the information.

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