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China’s Stocks Rebound on Banks’ Reserve-Ratio Cut Speculation

China’s stocks rose for the first time this year on speculation the central bank will cut banks’ reserve-requirement ratios as early as today to boost lending to small companies hurt by a cash crunch.

China Construction Bank Corp. and China Citic Bank Corp. advanced more than 1 percent after the government said it will suspend its bill sales before this month’s Lunar New Year holiday. PetroChina Co., the nation’s biggest energy producer, gained 1.6 percent after China raised the threshold of a windfall tax on crude. Tsinghua Tongfang Co., a computer maker, jumped 6.1 percent, helping technology companies to pare the second-biggest weekly losses among 10 industry groups.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 0.7 percent to 2,163.40 as of the close, erasing a drop of as much as 0.7 percent. The measure lost 1.6 percent this holiday-shortened week, the longest losing streak since the week ended June 25, 2004. The CSI 300 Index gained 0.6 percent to 2,290.60 today.

“Every time the stocks fall considerably, there’s speculation there’ll be reserve-ratio cuts,” said Zhang Gang, a strategist at Central China Securities Holdings Co. in Shanghai. “The weekend’s here and there’s always the optimism it may happen. Such a rebound may not last unless the cut really happens.”

The Shanghai Composite trades at 8.8 times estimated earnings, a record low according to Bloomberg data dating back to 2006, after plunging 22 percent last year on concern increases in borrowing costs and Europe’s debt crisis will derail economic growth. The CSI 300 slid 25 percent in 2011.

Small Companies Drop

Small-company stocks plunged this week because of investor disappointment that lenders’ reserve-requirement ratios haven’t been cut amid signs of a cash crunch as households prepare for Lunar celebrations that start Jan. 23. The Shenzhen Composite Index slumped 5.6 percent since the start of the new year. The ChiNext index of start-up companies fell 8.2 percent this week.

The central bank said today it will suspend its bill sales ahead of the Chinese new year holiday and will conduct reverse repo operations based on actual demand.

Industrial & Commercial Bank of China Ltd., the nation’s biggest bank, rose 0.7 percent to 4.28 yuan. China Construction Bank, the second-biggest lender, increased 1.5 percent to 4.65 yuan and China Citic Bank added 1.2 percent to 4.15 yuan.

The People’s Bank of China is injecting the most funds in eight weeks into the financial system. The central bank added a net 51 billion yuan ($8.1 billion) to the banking system this week as bill redemptions exceeded issuance, and canceled a second straight auction of three-month notes yesterday.

Reserve Ratios

China’s seven-day repo rate fell 17 basis points to 4.30 percent in Shanghai, based on a daily fixing by the National Interbank Funding Center. That compares with an average 3.82 percent for the fourth quarter of 2011. Royal Bank of Scotland Plc, Societe Generale SA and Credit Agricole SA said policy makers may be targeting a rate of no more than 3 percent.

Economists at Barclays Capital and Bank of America Corp. say the central bank will cut reserve ratios before the Chinese holiday, the second reduction since 2008. The central bank raised reserve ratios six times last year to cool inflation that accelerated to its fastest pace in three years in July.

Goldman Sachs Group Inc. said more cuts in banks reserve-ratio requirements and loosening of loan quotas are needed to ease liquidity and that there will be no imminent recovery for A-shares until liquidity is “sufficiently supportive.”

China’s economic growth will continue to weaken with relatively tight liquidity in the real economy and earnings growth forecasts facing downward pressure, Goldman Sachs said in a report dated Jan. 3. The earnings downgrade risk for small and mid-caps is “still high” given tight liquidity, it said.

Technology Stocks

The gauge for technology shares in the CSI 300 Index gained 1.9 percent today, narrowing this week’s loss to 4.9 percent, the most after drugmakers. Tsinghua Tongfang surged 6.1 percent to 8.67 yuan today, while Shenzhen Laibao High-technology Co. advanced 4 percent to 15.10 yuan.

The China Banking Regulatory Commission should raise the acceptable non-performing loan ratio in lending for small technology companies, the China Securities Journal reported today, citing Wang Huaqing, the regulator’s disciplinary commissioner.

The Chinese economy expanded 8.6 percent from a year earlier in the fourth quarter, the least since June 2009, according to the median estimate of 21 economists surveyed by Bloomberg. Export growth slowed to a two-year low of 13.5 percent in December.

China will roll out measures to boost consumption this year as it strives to meet challenges posed by a global slowdown, Commerce Minister Chen Deming said.

Windfall Tax

The government is studying policies to encourage spending on energy-saving products, and will take other measures including the promotion of online shopping and tourism, Chen told the ministry’s annual works conference, according to a statement posted on its website yesterday.

PetroChina gained 1.6 percent to 9.96 yuan after China’s finance ministry increased the threshold of the tax to $55 per barrel from $40, effective Nov. 1, 2011.

Citigroup Inc. estimated a 16 percent “positive impact” on PetroChina full-year earnings from the cut in the windfall profit tax. PetroChina became the top pick among three large-cap China oil stocks instead of China Petroleum & Chemical Corp. because of PetroChina’s “higher sensitivity” to the tax cut and Sinopec’s recent outperformance, Citigroup analyst Graham Cunningham said in a report dated yesterday.

Sinopec increased 0.8 percent to 7.48 yuan.

-- Editors: Allen Wan, Ravil Shirodkar

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