China’s Stocks Rise to Seven-Week High as Trading Volumes Surge

China’s stocks climbed, sending the benchmark index to the highest level in seven weeks. Brokerages rose as trading volumes jumped the most among Asian markets.

Citic Securities Co and Haitong Securities Co., the nation’s biggest brokerages, climbed more than 1 percent on the prospect increased trading activity and rebounding equities will bolster earnings. Gree Electric Appliances Inc. and SAIC Motor Corp. paced gains for consumer-discretionary companies, jumping at least 1.9 percent. Drugmakers posted the biggest loss among 10 industry groups, led by Yunnan Baiyao Group Co.

The Shanghai Composite Index rose for a fourth day, adding 0.8 percent to 2,299.99 at the close, the highest level since March 27. Trading volumes were 61 percent above the 30-day average, according to data compiled by Bloomberg. The index rose 1.6 percent last week, capping the longest streak of weekly gains in four months, on speculation the government will accelerate economic reforms.

“Stocks have risen a lot over the past few weeks and this has garnered attention from investors,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “Consumer-discretionary stocks were among those that haven’t risen as much and valuations are cheap.”

The CSI 300 advanced 0.7 percent to 2,609.61 today, while the Hang Seng China Enterprises Index surged 1.5 percent as Hong Kong’s markets resumed after a holiday. The Bloomberg China-US Equity Index gained 1 percent on May 17.

Economic Reforms

The Shanghai index jumped 1.4 percent on May 17, erasing this year’s losses, after the nation’s economic planning agency said investment projects for airports and gas fields won’t need pre-approval any more. The government has set up working groups to draft fiscal changes and financial restructuring, Caixin Online reported.

“Investors think the economic growth is actually not that bad as the government is expected to follow up with reforms,” said Tang Yonggang, an analyst at Hongyuan Securities Co. in Beijing. “Liquidity appears sufficient. They are now banking on companies with earnings potential like consumer discretionary and smaller-cap companies.”

Citic Securities gained 1.2 percent to 12,94 yuan. Haitong Securities rose 1.4 percent to 11.53 yuan. Hong Yuan Securities jumped 4 percent to 24.28 yuan.

China may face “large scale” inflows of speculative funds in the next few years, which will drive asset prices higher and push up consumer prices, Su Ming, deputy head of the Ministry of Finance’s research institute for fiscal science, said in an article published in today’s People’s Daily newspaper. The yuan traded within 0.2 percent of a 19-year high on speculation capital inflows will spur appreciation.

Consumer Stocks

Consumer-discretionary stocks gained 1.5 percent, the most among 10 industry groups on the CSI 300. The consumer sub-index has risen 5.3 percent over the past month, compared with 13 percent for a gauge of technology stocks and 24 percent for telecom companies. It trades at 12.5 times estimated profit, compared with the five-year average of 16.8.

Gree Electric, the largest maker of air-conditioners, surged 6.4 percent to 27.54 yuan, the biggest jump since Jan. 18. SAIC Motor, the biggest automaker, advanced 1.9 percent to 15.74 yuan. The demand outlook for household appliances and autos may improve after a report showed new home prices climbed last month in 68 out of 70 cities tracked by the government.

Increases in Guangzhou, Beijing and Shanghai were the biggest on a yearly basis since a change in data methodology in January 2011, a report from the National Bureau of Statistics showed May 18.

Property Dilemma

A gauge of developers in the Shanghai index dropped 0.7 percent today, after rising as much as 2 percent earlier. China may expand property tax trials to more cities this year, the China Securities Journal reported today, citing an unidentified person. China Vanke Co., the biggest developer, lost 1.9 percent to 11.93 yuan. Poly Real Estate Group Co., the second-largest, slid 1.1 percent to 12.25 yuan.

“Property stocks were rising in the morning because their fundamentals are decent,” said Wu. “With the issue of potential restrictions on property, there will always be a cap on gains for this industry.”

China’s policy makers are trying to avoid property bubbles and make homes more affordable while bolstering an economy that lost steam in the first quarter. Expanding a campaign against housing speculation could choke off real-estate development that is helping counter a slowdown in manufacturing investment and supporting demand for steel, cement and household goods.

Drugmakers Fall

The health-care stocks gauge in the CSI 300 slid 3.2 percent, the biggest loss among 10 industry groups and the largest drop since April 2. Kangmei Pharmaceutical Co. declined 1.9 percent to 16.67 yuan and China Resources Double-Crane Pharmaceutical slumped 7 percent to 21.47 yuan.

Guangdong province plans to start an online medical bidding system, according to a statement posted the southern province’s health department website. Drug transactions of public hospitals and private health-care institutions under government insurance programs will be on the new platform, the Southern Metropolitan Daily reported, citing the draft. The report is creating concern among investors as this may have an impact on drug prices, according to Capital Securities.

Chen Li, the UBS AG strategist who predicted the tumble in China’s smallest shares two years ago, says the companies are poised to retreat again after valuations rose to the biggest premium over larger stocks since 2010.

The ChiNext index of Shenzhen-listed companies rose 2.8 percent today, adding to a 47 percent jump this year. The smaller-company gauge trades for 4.6 times net assets versus 1.7 for the CSI index, the widest gap since June 2010, data compiled by Bloomberg showed as of May 17.

“The bubble may burst” within two months, Chen said in a May 9 phone interview. The Shanghai-based strategist predicted in January 2011 that small-cap stocks would drop as much as 20 percent. The ChiNext gauge fell 21 percent in nine months.

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