China’s Stocks Rise Most in Month Amid SOE Merger Speculation

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Quantitative Easing Chinese Style...

China’s stocks rallied for their biggest gain in a month amid speculation the government will accelerate mergers of state-owned enterprises to bolster economic growth.

The Shanghai Composite Index jumped 4.9 percent to 3,928.42 at the close, led by industrial, energy and telecom companies. China Shipbuilding Industry Co., China Coal Energy Co. and China United Network Communications Ltd. all surged by the 10 percent daily limit. China is considering combining China Shipping Group and Cosco Group, its two major shipping companies, according to people familiar with the matter.

The nation’s cabinet has approved plans to overhaul SOEs, the biggest of its kind in more than a decade, to boost the economy, the South China Morning Post reported. Data over the weekend showed producer prices fell in July to the lowest level since 2009 and exports dropped more than expected.

“State-owned enterprise mergers are an investment theme that’s quite certain and there are signs that the move will speed up,” said Li Jingyuan, general manager at Shanghai Zhaoyi Asset Management, who is adding to his stock holdings. “SOE reforms can drive the market higher.”

The Shanghai gauge has rebounded 12 percent since the July low as authorities took unprecedented measures to shore up markets including banning stake disposals by major shareholders, suspending initial public offerings and compelling state-run institutions to support the market with equity purchases.

SOE Reform

The CSI 300 Index rose 4.5 percent. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong added 0.6 percent, while the Hang Seng Index slipped 0.1 percent. Trading volumes in Shanghai were 8.2 percent lower than the 30-day average.

The State Council approved shake-up will likely result in two new companies similar to Temasek Holdings Pte, Singapore’s state-owned investment company, which will channel funds to SOEs and pressure them to turn a profit, the South China Morning Post reported, citing unidentified sources close to the decision-making process. The State-owned Assets Supervision and Administration Commission will no longer directly intervene in the running of most SOEs, the paper said.

Gauges of phone, industrial and energy shares in the CSI 300 rose more than 5 percent for the steepest advances among 10 industry groups.

China CSSC Holdings Ltd. and China First Heavy Industries all jumped 10 percent. China United Network, which controls China Unicom (Hong Kong) Ltd., posted its biggest gain in a month. China Unicom, which had soared in February on merger speculation, added 3.2 percent in Hong Kong.

Trade Data

The government may combine China Shipping Group and COSCO Group or merge some of their operations, according to the people, who asked not to be identified because the deliberations aren’t public. The two companies’ listed units including China Shipping Development Co. and China Cosco Holdings Co. were suspended from trading on Monday.

“The possible integration of COSCO and CSCL has been strengthening market expectation of accelerated SOE reform,” China International Capital Corp. analysts led by Hanfeng Wang wrote in a report dated Aug. 10. “As the market expectation has already adjusted and the position of institutions is not high in general, there has been rising expectation for policy reinforcement amid the weak economic climate.”

The producer-price index fell 5.4 percent year on year last month, according to the National Bureau of Statistics. The drop, which exceeded the median estimate for a 5 percent decrease, extends declines to 41 straight months. The consumer-price index increased 1.6 percent, as a surge in pork prices offset sluggish growth in the cost of non-food items.

Exports fell 8.3 percent from a year earlier in dollar terms, the customs administration said. The reading was below the estimate for a 1.5 percent decline in a Bloomberg survey and compared with an increase of 2.8 percent in June. Imports dropped 8.1 percent, widening from a 6.6 percent decrease in June.

Margin traders increased holdings of shares purchased with borrowed money on Friday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising by 0.7 percent to 845.6 billion yuan ($136.2 billion).

— With assistance by Shidong Zhang

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