China’s stocks rose the most in five weeks, the yuan gained and interest-rate swaps fell as lenders’ reserve-ratio requirement was cut for the first time since 2008 and six central banks took action on Europe’s debt crisis.
The Shanghai Composite Index climbed 2.3 percent to 2,386.86 at the close, while the Hang Seng China Enterprises Index of Chinese stocks traded in Hong Kong rallied 8.3 percent. Financial companies and commodity producers advanced the most in Shanghai, with China Life Insurance Co. rising more than 7 percent and Jiangxi Copper Co. jumping the most in six months. The yuan advanced the most in seven weeks while interest-rate swaps dropped to a one-year low.
“This RRR cut is very positive for the banks,” Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Bank, said in a telephone interview. “They timed it with the other central banks to inject liquidity into the system” in a move that will help spur a rebound for stocks.
A report today showed China’s manufacturing contracted for the first time since February 2009. The Purchasing Managers’ Index fell to 49.0 in November from 50.4 in October, the China Federation of Logistics and Purchasing said in a statement. The median estimate in a Bloomberg News survey of 18 economists was 49.8. A level above 50 indicates expansion.
Chinese banks’ reserve ratios will decline by half a percentage point effective Dec. 5, the People’s Bank of China said yesterday after local markets closed. The level for the biggest banks falls to 21 percent from a record 21.5 percent. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG.
The central bank cut the requirement amid signs that inflation is slowing, manufacturing data is “disappointing” and the European debt crisis has worsened, said Hao Hong, global equity strategist of China International Capital Corp., the top-ranked provider of China research in Asiamoney’s survey.
“For this rebound to evolve into a sustainable rally, we need to see some concrete steps to resolve the sovereign crisis and stem the possibility of a global economic relapse,’ he said.
The U.S. Federal Reserve, the European Central Bank and the monetary authorities of the U.K., Canada, Japan and Switzerland said they were cutting the cost of emergency dollar funding to ease strains in financial markets. Global markets rallied, with the Standard & Poor’s 500 Index rising 4.3 percent yesterday.
Growth in China’s economy, the world’s second largest, will slow to 8.5 percent next year, the Paris-based Organization for Economic Cooperation and Development said, down from its May forecast of 9.2 percent. The economy expanded 9.1 percent in the third quarter from a year earlier, the least in two years. UBS this week lowered its prediction for growth in 2012 to 8 percent from its previous call of 8.3 percent, and Citigroup Inc. cut its forecast to 8.4 percent from 8.7 percent.
The Shanghai Composite has fallen 15 percent this year after the central bank raised interest rates three times and lifted the reserve-requirement ratio six times to curb inflation that reached a three-year high of 6.5 percent in July. The gauge is valued at 11.3 times estimated earnings, compared with a four-year average of 17.3 times, according to weekly data compiled by Bloomberg.
China’s decision to cut the reserve-requirement ratio will benefit small banks, brokerages, material producers, property developers and insurance companies the most, CICC’s Hong wrote in a note.
China Life Insurance gained 7.9 percent, the most since July 2009, while rival Ping An Insurance Group Co. added 5.5 percent. Huaxia Bank Co., partly owned by Deutsche Bank AG, gained 3.7 percent, while China Merchants rallied 3.9 percent. China Vanke Co., the biggest Chinese developer, rose 4.7 percent. Jiangxi Copper, the nation’s largest producer of the metal, jumped 6.1 percent.
‘‘The PBOC’s move will provide the needed liquidity for the market to ensure economic growth,” said Daniel Chan, chief economist at BWC Capital Markets in Hong Kong. “The yuan also gained on the dollar’s weakness given the co-ordinated moves among the world’s major central banks. These measures boosted the appeal of Chinese assets.”
The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, declined 0.2 percentage point to 2.81 percent in Shanghai, according to data compiled by Bloomberg. The yield on the government’s benchmark three-year bond dropped 14 basis points to 2.93 percent. Both rates were the lowest since November 2010.
The yuan gained 0.24 percent to close at 6.3635 per dollar in Shanghai, the biggest one-day advance since Oct. 12, according to the China Foreign Exchange Trade System. The People’s Bank of China raised its daily reference rate 0.2 percent, the most in a month, to 6.3353. The currency is allowed to trade up to 0.5 percent on either side of the reference rate.
UBS forecasts a gain of up to 30 percent for the Shanghai Composite next year as liquidity is expected to improve and the cost of capital may decrease, according to a report today.
“We expect a modest recovery in the A-share market,” Li Chen, UBS’s Shanghai-based head of China equity strategy, said in a report. While the stock market’s price-earnings ratio will increase, corporate profit growth may continue to decline for the next two-to-three quarters, Chen said. The strategist didn’t immediately respond to phone calls or an e-mail message on whether the forecasts were made before the reserve-ratio cut.
Premier Wen Jiabao aims to sustain China’s economic expansion as Europe’s debt crisis saps exports, a credit squeeze hits small businesses and a crackdown on real-estate speculation sends home sales sliding.
China’s reduction in reserve requirements for bank signals a “shift in focus” from anti-inflation to economic growth stability, Citigroup Inc. said.
The inflation rate may have fallen to 4.3 percent in November from 5.5 percent the previous month, CICC’s Hong said. The November data are due on Dec. 9. The government’s full-year inflation target is 4 percent.
“The reserve requirement ratio cut came earlier than expected and that’s definitely a short-term positive,” said Chen Liqiu, a strategist at Jianghai Securities Co. in Shanghai. “This will attract more liquidity into stocks. Still, this pre-emptive move probably means the government is seeing a weaker economy than usual.”