China’s Stocks May Extend Gain on Reserve Cut, BofA Says

China Stocks to Extend Gain on Reserve Cut
The Shanghai Composite has rebounded 7.2 percent this year, after falling a combined 33 percent in the previous two years. Photographer: Qilai Shen/Bloomberg

China’s stocks may extend gains into a sixth week after the government cut lenders’ reserve-requirement ratios for the second time in three months, according to Bank of America Corp. and Dazhong Insurance Co.

Reserve ratios will fall 50 basis points from Feb. 24, the People’s Bank of China said on its website Feb. 18. The Shanghai Composite Index rose 0.2 percent last week, a fifth week of gains and the longest winning streak since November 2010, on speculation the government would reduce the ratio a second time to boost economic growth after cutting them Nov. 30.

“The market will react positively to the reserve-ratio cut,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The turning point for liquidity has appeared. What we want to see next is if the slowdown in economic growth can be halted after these measures are implemented.”

The Shanghai index gained 0.3 percent to 2,363.60 at the close, adding to a 7.5 percent rebound this year, after falling a combined 33 percent in the previous two years. The gain lags behind a 16 percent jump for the MSCI Emerging Markets Index and a 17 percent rally for the Hang Seng China Enterprises Index of Chinese companies that are publicly traded in Hong Kong.

The Shanghai gauge trades at 9.7 times estimated profit, less than the MSCI index’s 10.7 multiple, according to data compiled by Bloomberg. China’s yuan-denominated A shares may catch up with the rally in global equity markets once the easing cycle is confirmed, Minggao Shen, Citigroup Inc.’s head of China research, wrote in a report dated yesterday.

‘A Surprise’

Concerns about China’s economic slowdown intensified after January data showed exports and imports falling for the first time in two years, new lending was the lowest for that month in five years and money supply grew the least in more than a decade. China’s expansion may be cut almost in half if Europe’s debt crisis worsens, the International Monetary Fund said in a Feb. 6 report.

“The markets have been awaiting this RRR cut since end-2011,” Lu Ting, a Hong Kong-based economist at the Merrill Lynch unit of Bank of America, wrote in a report. “This RRR cut is to some extent a surprise and will definitely be positive for markets in the coming week.”

The Bank of America economist, who had forecast a reserve-ratio cut in the first quarter, said the central bank will reduce the ratio twice more before the end of this year. Bank of America was rated first for Asia research in 2011 by Institutional Investor magazine.

‘Great News’

At least three more reserve-ratio cuts are needed this year to restore the confidence of business leaders to promote more investment in the near-term, Citigroup said. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. are among Citigroup’s “top buys” among Chinese banks, while Jianxi Copper Co. was recommended among miners.

China’s reserve-ratio cut will be “great news” for stocks as it signals the government is encouraging banks to lend to small companies hurt by the nation’s credit crunch, Gavin Parry, managing director of Hong Kong-based Parry International Trading Ltd., wrote in an e-mail yesterday.

The reduction is further evidence that liquidity will improve after the government set a higher target for 2012 money supply growth, he said. China’s M2 will probably grow by about 14 percent this year, the central bank estimates. That compares with a 13.6 percent increase in 2011.

— With assistance by Allen Wan, and Shidong Zhang

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