China Stocks Rise as Small-Cap Gauge Surges Most in Two Months

  • Speculation of relaxed margin trade restrictions lifted shares
  • Fed officials scaled back forecasts for U.S. rate increases

China’s stocks rose, with a gauge of small-company shares surging the most in two months, after U.S. Federal Reserve officials scaled back their forecasts for interest-rate increases and investors speculated some banks may resume margin loans.

The Shanghai Composite Index advanced 1.2 percent, led by technology companies. The ChiNext index in Shenzhen jumped 5.6 percent, while the southern city’s benchmark index rose to a three-week high, a day after Premier Li Keqiang said China will seek to start a stock-trading link between Shenzhen and Hong Kong this year. There was speculation that some commercial banks have resumed non-brokerage margin lending, which was banned by regulators last summer, Guotai Junan Securities wrote in a note.

A relaxation of restrictions on margin loans, which fell to the lowest level since November 2014 on Wednesday, could add fuel to a rally that lifted the Shanghai Composite by 8.1 percent this month. Shenzhen’s market will beat most global peers by the end of this year and top all others in the next three to five years as the city’s technology companies grow, said Jordi Visser, head of investments at $1.4 billion U.S. hedge fund Weiss Multi-Strategy Advisers.

“There’s some chatter in the market” that margin-trading curbs will be eased, said Zhao Bingtong, Shenzhen-based trader at Guosen Securities Co. “We are not sure whether it’s true or not. But banks have much bigger cash base to provide loans than brokerages and if that is true, it’s a good boost to the stock market.”

The Shanghai gauge advanced for a fifth day to 2,904.83 at the close. More than 1,000 stocks in the index advanced and only 29 declined, including Industrial & Commercial Bank of China Ltd. and PetroChina Co., long considered targets of government buying during down days because of their large index weightings.

The Shenzhen Composite surged 3.6 percent. Technology and consumer-discretionary companies led gains among industry groups in the CSI 300 Index, with East Money Information Co. and Hundsun Technologies Inc. jumping by their daily limit of 10 percent. The Hang Seng China Enterprises Index increased 2.4 percent at the close in Hong Kong, while the benchmark Hang Seng Index added 1.2 percent.

Margin Lending

While there is some recovery in demand for margin financing, it’s still not very active, Guotai Junan said in the note. The China Securities Regulatory Commission didn’t immediately respond to a faxed request for comment.

The Fed on Wednesday held its benchmark interest rate steady, while officials at the central bank lowered their projections for future increases to two 25 basis-point moves this year, down from four forecast in December.

“The post-FOMC boost to risk sentiment was extended to the Chinese indices, where we are seeing a broad-based rally,” said Bernard Aw, a strategist at IG Asia Pte in Singapore. “I don’t see any signs of state buying for the rally, as smaller stocks were making good gains.”

The Shenzhen gauge, home to about 1,800 companies in industries from technology to health care, slumped 26 percent this year through Wednesday. That compares with a 19 percent loss in the larger Shanghai Composite and a 2.3 percent drop by the MSCI All-Country World Index.

Shenzhen Outlook

In a situation he likens to the U.S. in the early 1980s, Visser sees China succeeding in its attempts to move from an economy driven by industrial expansion to one focused on technological efficiency. While shares in Shenzhen may still look expensive relative to the rest of the world, valuations have become more reasonable, he said.

The Shenzhen Composite traded this week at 39 times reported earnings, almost half the level of last year’s peak. While that’s higher than the 29 multiple of the technology-heavy Nasdaq Composite Index in the U.S., companies listed on the Chinese index are projected to boost sales by 37 percent this year, compared with a 4.4 percent increase for firms in the Nasdaq gauge.

The government “will try our best” to begin the Shenzhen connect in 2016, Li told reporters at his annual news conference in Beijing Wednesday. The exchange link will expand an existing program between Shanghai and Hong Kong and enable offshore investors to access many of the nation’s technology and high-growth shares.

The yuan fell to a 15-month low versus a basket of currencies on Thursday as a smaller-than-estimated increase in the central bank’s fixing spurred speculation that China is trying to limit gains against the dollar.

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