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China’s Stocks Rise Most in 2 Weeks on Banks, Small Firm Support

China's Premier Wen Jiabao
Wen Jiabao, China's premier. Photographer: Michele Tantussi/Bloomberg

China’s stocks rose, driving the benchmark index’s biggest gain in two weeks, after Premier Wen Jiabao offered more support to smaller companies and investors speculated the government will help banks replenish capital.

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the country’s largest lenders, climbed more than 2 percent after the 21st Century Business Herald reported the biggest shareholder in state-owned banks will accept lower dividend payout ratios. Xinjiang Talimu Agriculture Development Co. and Hunan Dakang Pasture Farming Co. jumped by the daily limit after the Xinhua News Agency said the government will boost investment in agriculture.

“The government’s support for smaller companies is positive given their large share of the economy,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “That’ll help investors become more optimistic that the economy will hit a bottom soon.’

The Shanghai Composite Index rose 44.48 points, or 2 percent, to 2,312.56 at the close, its biggest gain since Jan. 17. The CSI 300 Index climbed 2.4 percent to 2,486.24. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, added 1.6 percent in New York.

The Shanghai Composite has climbed 5.1 percent this year, after plunging 33 percent in the previous two years, on speculation slowing economic growth will push the central bank to relax monetary policies and the government will take measures to support stocks. The measure trades at 9.5 times estimated earnings, near the record low of 8.9 times reached on Jan. 6, according to weekly data compiled by Bloomberg.

Support Small Companies

Premier Wen said the government will support small companies with a 15 billion-yuan ($2.4 billion) fund as growth moderates in the world’s second-largest economy.

China will also extend preferential tax policies for small companies until 2015 and will ask banks to increase tolerance of bad loans to these businesses, according to a statement posted on the central government’s website yesterday, citing a State Council meeting presided by Wen. The nation’s small companies have been hurt by a credit squeeze after the government boosted lenders’ reserve-ratio requirements over the past two years.

ICBC, the nation’s biggest listed lender, climbed 2.3 percent to 4.38 yuan. Construction Bank, the second largest, added 2.3 percent to 4.85 yuan. Bank of Communications Ltd., part-owned by HSBC Holdings Plc, rose 3.1 percent to 4.93 yuan.

Lower Dividend Payout

Central Huijin Investment Co., which holds stakes in China’s largest banks, may accept lower dividend payout ratios from the lenders to help them replenish capital, the 21st Century Business Herald reported today, citing an unidentified person close to regulators. The proportion of cash dividend payouts may decrease by 5 percentage points from 40 percent of profits now, it said.

ICBC paid out 39 percent of its 2010 profit as dividends, compared with 44 percent in 2009 and 50 percent in 2008, according to data compiled by Bloomberg. Construction Bank’s payout ratio dropped to 39 percent in 2010 from 44 percent in 2009 and 49 percent in 2008, Bloomberg data showed.

China’s interest-rate swaps fell for the first time this week on speculation a cash shortage will persuade policy makers to cut banks’ reserve-requirement ratios.

‘‘I still expect China to do something and cut reserve ratios this month,” said Frances Cheung, a Hong Kong-based strategist at Credit Agricole CIB. “I think liquidity is still going to be tight, if there is no liquidity injection.”

Interest-Rate Swap

The one-year swap rate, the fixed cost to receive the seven-day repo rate, decreased 14 basis points, 0.14 percentage point, to 3.16 percent as of 3:33 p.m. in Shanghai, according to data compiled by Bloomberg. It touched 3.35 percent yesterday, the highest level since Nov. 3.

The central bank canceled a sale of three-month bills for a sixth week today as maturing reverse-repurchase contracts decrease cash supply in the financial system. The People’s Bank of China announced on Nov. 30 it would lower reserve ratios by 0.5 percentage point from a record high of 21 percent, the first such cut since 2008, as inflation cooled.

Talimu Agriculture surged by the maximum 10 percent to 8.22 yuan. Hunan Dakang jumped 10 percent to 12.03 yuan. Dalian Zhangzidao Fishery Group Co., a sea-farming company, added 2.4 percent to 23.21 yuan.

China will expand the fiscal budget for agriculture this year, direct more fixed-asset investment to the sector and offer more subsidies for major grain-producing areas, as part of efforts to stabilize grain production, Xinhua reported, citing a document by the Central Committee of the Communist Party of China and the State Council. The nation is trying to boost agricultural output to feed its 1.35 billion people.

Hard Landing Risk

China’s stocks fell yesterday on concern a rebound in manufacturing will reduce the need for more loosening of monetary policy. The official purchasing managers’ index increased to 50.5 from 50.3 in December, exceeding economists’ estimates. The data may have been distorted by a weeklong holiday as readings for new export orders and imports contracted for a fourth month.

The nation’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the U.S. recession that began in December 2007.

“They slammed on the brakes,” Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said at the Bloomberg Link China Conference in New York yesterday. “Transition is not easy because they are geared up to exports.”

‘Untouchable’ Stocks

The two-year slump in Chinese stocks is partly a result of investor distrust of the nation’s capital markets amid reports of insider trading, according to Gary Rieschel, founder and managing director of Shanghai-based Qiming Venture Partners.

China Securities Regulatory Commission Chairman Guo Shuqing has pledged to crack down on insider trading, China Business News reported Jan. 12, citing comments made by Guo at a meeting by the regulator.

Chinese stocks traded in the U.S. have been tainted by allegations of fraud involving companies like Sino-Forest Corp. and are “pretty much untouchable,” according to Perella Weinberg Partners LP’s Daniel Arbess.

Muddy Waters LLC’s Carson Block alleged Sino-Forest and U.S.-traded digital advertiser Focus Media Holding Ltd. overstated assets, spurring a regulatory investigation into the timber company.

Short sellers have “clobbered the valuation of the companies,” Arbess said at the Bloomberg Link China conference in New York yesterday. “Once somebody yells fire, the market’s inclination is to get out of the building and worry about that later.”

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