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China Stock Rally Defies Construction Slowdown: Chart of the Day

Sept. 2 (Bloomberg) -- Chinese stocks are decoupling from steel prices by the most in three years as equity investors bet Asia’s largest economy will withstand a property slowdown.

The CHART OF THE DAY tracks the Shanghai Composite Index against a gauge of the most liquid steel contracts traded in the city. The stock measure has rallied 12 percent since its March low. Steel reinforcement-bar futures have fallen 10 percent in the period to their lowest level since trading started in 2009. While fixed-asset investment growth slowed in the first seven months to the weakest since 2001 and sales of buildings plunged in July by the most in four years, the nation’s exports surged 14.5 percent in the biggest increase since April 2013.

Rising overseas demand for Chinese goods supports Premier Li Keqiang’s 7.5 percent goal for economic expansion this year. Li also ordered targeted stimulus to help areas of the economy including agriculture, railways, low-income housing and small businesses, following a first-quarter slowdown. New home prices fell in July in almost all cities the government tracks.

The property market slump “shouldn’t halt growth in the rest of the economy,” Donna Kwok, senior China economist at UBS AG, said by phone from Hong Kong. “Firstly because the export recovery is holding up, and secondly as government policies are helping to prop up other parts of the economy such as infrastructure, SMEs, agriculture, and what they can within the property sector.”

Steel prices are tumbling as state-owned producers maintain output at the same time as demand weakens. The nation’s steel industry has excess capacity of between 180 million metric tons and 240 million metric tons, the China Daily reported Aug. 7, citing the country’s trade association. Baoshan Iron & Steel Co., the nation’s largest listed producer, reported a 15 percent drop in net income for the first half of the year.

Chinese exports probably grew 10.7 percent last month, according to a Bloomberg survey of economists before the data is released on Sept. 8. That would be the second-fastest pace since November.

To contact the reporters on this story: Richard Frost in Hong Kong at rfrost4@bloomberg.net; Alex Davis in Hong Kong at adavis150@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

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