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China’s Stocks Rise Most in Month on Improving Earnings Outlook

China’s stocks rose the most in a month as automakers got a boost from the government’s pledge to buy more alternative-energy cars, while utilities and consumer-staples shares gained on speculation profit will beat estimates.

BYD Co., the electric automaker partially owned by Warren Buffett’s Berkshire Hathaway Inc., climbed at least 3.6 percent in Shenzhen and Hong Kong. Huaneng Power International Inc. advanced the most in three months after China International Capital Corp. said it expects the power producer to report better-than-projected profit. Kweichow Moutai Co. led consumer-staples producers to the biggest gain among industry groups.

The Shanghai Composite Index rose 1 percent to 2,066.65 at the close, the biggest gain since June 10. China is mandating that electric cars make up at least 30 percent of government vehicle purchases by 2016, the latest measure to fight pollution. The government will report data on foreign direct investment and money supply for June as early as today.

“The new policy by the government to buy more alternative-energy cars is boosting hopes that auto sales will increase,” Zhang Yanbing, an analyst at Zheshang Securities Co., said from Shanghai. “With electricity prices increasing, earnings of utilities such as Huaneng should rise. Last week’s data has shown that our economy is stabilizing so we are quite optimistic about this week’s data too.”

The CSI 300 Index climbed 1.1 percent. The Hang Seng China Enterprises Index added 0.6 percent at 3:28 p.m. The Bloomberg China-US Equity Index gained 0.5 percent on July 11. Trading volumes in the Shanghai Composite were 32 percent above the 30-day average, according to data compiled by Bloomberg.

Profit Growth

Chinese companies will report 10.6 percent earnings growth on average in the first half, compared with 8.1 percent in the first quarter, CICC wrote in a report today, referring to firms under its coverage. Mini-stimulus has helped stabilize the economy, analysts led by Hanfeng Wang wrote. The earnings season started this month and will last until the end of August.

The Shanghai measure has rebounded about 2.7 percent from this year’s low in May after data such as manufacturing and producer prices signaled economic growth is stabilizing. This week’s data include China’s second-quarter economic growth and first-half home sales on July 16, and home prices on July 18.

China’s economy probably expanded 7.4 percent in the three months to June 30 from a year earlier, according to the median of 44 economists’ estimates compiled by Bloomberg.

BYD climbed 3.9 percent in Shenzhen and 3.5 percent in Hong Kong. At least 15 percent of new government vehicles will use alternative energy this year in areas such as Beijing and the Pearl River Delta in Guangdong province, the government said in a statement. Shenyang Jinbei Automotive Co. surged 4.7 percent.

Staples, Utilities

A gauge of consumer-staples shares in the CSI 300 increased 2.7 percent, the most among 10 industry groups. Kweichow Moutai, the biggest producer of baijiu liquor, gained 5.6 percent. Rival Wuliangye Yibin Co. jumped 5.9 percent.

First-tier liquor makers are seeing a recovery as inventories decline and their first-half earnings are expected to be good, Wei Wei, analyst at West China Securities in Shanghai, said by phone today.

A measure of utilities in the CSI 300 rose 1.7 percent today, extending this year’s gain to 3.1 percent, the best performer among industry groups. Huaneng Power was cited by CICC as a company that may have a potential “upside surprise” in its first-half earnings. Citic Securities Co. said last week that power producers may post earnings that exceed analyst estimates on lower coal costs.

The Shanghai Composite trades at 7.6 times 12-month projected earnings, compared with 7 times for the Hang Seng China index, according to data compiled by Bloomberg.

Arbitrage Opportunity

The Hang Seng China AH Premium index dropped 0.3 percent to 90.72 on July 11, signaling a 9.3 percent discount for A shares. A reading of 100 would show valuations on the two markets had converged.

Robeco is using its quota under China’s Qualified Foreign Institutional Investor program to buy mainland consumer and industrial firms with dual listings in Hong Kong, anticipating the price gaps will narrow as an exchange link with Shanghai makes it easier for money to move between the two bourses.

While the mainland discount has grown as local investors exit the Chinese market and international money managers await details of the exchange tie-up, Arnout van Rijn, Robeco’s chief investment officer in Hong Kong, says those who buy now and have the resolve to hold their positions will be rewarded.

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