China’s Stocks Rise to Seven-Year High on SOE Merger Speculation

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China’s stocks rallied the most in three months amid speculation the government is considering merging state-owned enterprises and taking more steps to support economic growth.

PetroChina Co., China Petroleum & Chemical Corp., Cosco Shipping Co. and Baoshan Iron & Steel Co. all jumped by the daily limit of 10 percent. China may cut the number of centrally administered SOEs to 40 from the current 112 through mergers and restructuring, the Economic Information Daily reported. The central bank is discussing adopting unconventional policies to reinvigorate the economy, including making direct purchases of local government bonds from the market, Market News reported.

The Shanghai Composite Index rose 3 percent to 4,527.40 at the close, the most since Jan. 21. The gauge has rallied 95 percent in the past six months, the most among benchmark indexes globally, on speculation SOE reform and cuts in interest rates will allow the government to reach its growth targets this year.

“Big oil names are soaring because of speculation that the government is studying mergers in the industry,” said Clement Cheng, a trader at RBC Investment Management Asia in Hong Kong. “The oil sector has been undervalued for a long time.”

The Hang Seng China Enterprises Index added 1.7 percent, while the Hang Seng Index rose 1.3 percent. The CSI 300 Index climbed 2.2 percent. The Bloomberg China-US Equity Index increased 1.1 percent on Friday. Trading volumes in Shanghai were 20 percent above the 30-day average.

SOE Reform

A gauge of energy companies in the CSI 300 jumped 6.2 percent for the biggest gain among 10 industry groups. Sinopec Shanghai Petrochemical Co. soared 10 percent. China Shenhua Energy Co., the largest coal producer, advanced 7.2 percent. PetroChina and Sinopec, the biggest refiners, gained at least 6.7 percent in Hong Kong.

China’s state-asset regulator may cut the number of centrally administered SOEs to 40 through mergers and restructuring, the Economic Information Daily reported, citing unidentified people. The plan aims to focus resources on larger companies and avoid vicious competition in overseas bidding, the report said.

Industrial shares in the CSI 300 rallied 4.5 percent, extending an advance over the past six months to 161 percent, the most among the groups. China Shipping Container Lines Co., which said this month it hadn’t heard of any potential merger with China Cosco Holdings Co., advanced 10 percent. China Spacesat Co. climbed 10 percent after domestic media reported on a plan to launch more satellites as part of the nation’s Silk Road plan. Wuhan Iron & Steel Co. led gains for steelmakers, rising 10 percent.

Ample Liquidity

Industrial profits fell 0.4 percent in March, compared with a drop of 4.2 percent in the first two months, according to data released today from the National Bureau of Statistics. The People’s Bank of China is discussing adopting unconventional policies to rebuild its balance sheet and boost the economy, including making direct purchases of local government bonds from the market, Market News reported, citing unidentified people.

The Shanghai index trades at 17.4 times estimated earnings for the next 12 months, compared with the average of 10.2 in the past five years. The seven-day repurchase rate declined to as low as 2.38 percent on Monday, the lowest since March 2014, while interest-rate swaps slid to the lowest level since 2012.

“The central bank may be shifting its priority to keeping liquidity loose to ensure economic growth targets are met,” said Deng Haiqing, a Citic Securities Co. analyst in Beijing. “In contrast to the tightly balanced money market in 2013 and 2014, we expect it to remain ample as the new normal.”

CSRC Crackdown

After the market close on Friday, the China Securities Regulatory Commission announced a campaign to crack down on stock-market manipulation and insider trading, the latest effort to reduce risks as an equities boom lures a record number of novice investors. The outstanding balance of margin debt on the Shanghai Stock Exchange climbed to an all-time high of 1.19 trillion yuan ($194 billion) on Friday.

“It’s a mixture of continuing domestic bullish sentiment for the stock market and further expectation of monetary easing,” said Nick Cheng, head of derivatives trading at Liquid Capital Markets Hong Kong Ltd. “We see the CSRC trying to intervene to cool down the speed of the rally but not to kill the rally. The record high margin finance is the biggest indication of how retail investors view the market.”

The CSRC will target trading by brokerage employees using non-public information, and market manipulation, including futures prices, the regulator said in a Friday statement. The regulator also cited insider trading in over-the-counter markets and accounting fraud in mergers and acquisitions.

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