China’s Stocks Rally for Biggest Two-Day Advance in 18 Months

China’s stocks rallied, sending the benchmark index to its biggest two-day gain in 18 months, on speculation the government will take measures to bolster economic growth.

Industrial Bank Co. jumped 10 percent, Haitong Securities Co. surged 9.9 percent and China Life Insurance Co. rose 6.5 percent as a gauge of financial companies in the CSI 300 Index gained the most since March 2009. Poly Real Estate Group Co., China’s second-largest developer, advanced 6.1 percent after reporting higher first-half profit. Anhui Conch Cement Co. and Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. paced a rally for material producers with gains of more than 7 percent.

The Shanghai Composite Index rose 3.2 percent to 2,072.99 at the close, adding to yesterday’s 2.2 percent gain. The two-day rally is the biggest since January 2012. The CSI 300 added 4.6 percent to 2,326.69. The Hang Seng China Enterprises Index gained 3.6 percent after Federal Reserve Chairman Ben S. Bernanke said the U.S. will continue to need stimulus. Premier Li Keqiang said in a speech this week that the nation’s economic growth and employment must stay above a certain floor, according to Nomura Holdings Inc.

“There’s some speculation that there will be some small-scale stimulus plan from the government to prevent economic growth from slumping too much,” said Dai Ming, a money manager who helps oversee $19 million at Hengsheng Hongding Asset Management Co. “The speculation may push up stocks like cyclical companies.”

Cyclical Stocks

A gauge of financial companies in the CSI 300 including banks, brokerages and developers jumped 6.8 percent, the most among 10 industry groups. Industrial Bank, part-owned by a unit of HSBC Holdings Plc, surged 10 percent to 10.40 yuan. Haitong Securities, the second-biggest brokerage, added 9.9 percent to 10.93 yuan. China Life, the nation’s biggest insurer, climbed 6.5 percent to 14.16 yuan.

A measure of material stocks in the CSI 300 climbed 4.6 percent. Baotou Rare-Earth surged 10 percent to 25.56 yuan. Yunnan Yunnan Tin Co., the world’s largest producer of the metal, rose 6 percent to 13.14 yuan. Anhui Conch, the biggest Chinese cement producer, jumped 7.4 percent to 14.38 yuan.

Premier Li signaled in a July 9 speech that the government’s policy stance may soften in the second half of the year, Zhang Zhiwei, an economist at Nomura, wrote in a note today.

Li’s Comments

Li is feeling more pressure as economic data continue to weaken and risks to the 7.5 percent growth target increase, Zhang wrote. The statistics bureau is scheduled to release data on second-quarter economic growth on July 15. Growth may have slowed to 7.5 percent from 7.7 percent in the first three months, according to the median estimate of 34 economists in a Bloomberg survey.

As long as the “economic growth rate, employment and other indicators don’t slip below our lower limit and inflation doesn’t exceed our upper limit,” China will “focus on adjusting the structure, promoting reform and pushing forward economic transformation and upgrading,” Li said in Guangxi, the official Xinhua News Agency reported. He didn’t elaborate on the limits.

Li may announce “targeted” policy support measures in coming months, boosting investment in urban infrastructure, affordable housing and public services to bolster domestic consumption, Jian Chang, an economist at Barclays Plc, wrote in a note to clients.

Developers’ Financing

The Shanghai measure has fallen 8.6 percent this year as data from industrial production to exports pointed to a slowdown in the economy and as money-market rates reached record highs last month. The index trades at 8.5 times 12-month projected profit after valuations fell in June to the lowest level in at least five years, data compiled by Bloomberg show.

Trading volumes in the Shanghai index were 70 percent higher than the 30-day average. The measure’s 30-day volatility was at 26.1 today, the highest since December 2010, according to data compiled by Bloomberg.

A gauge of property developers in the Shanghai Composite gained 4.6 percent, the most among five industry groups. China Vanke Co., the biggest developer, surged 4.9 percent to 10.78 yuan. China Merchants Property Development Co., the third largest, rose 4.7 percent to 28.05 yuan. Poly Real Estate advanced 6.1 percent to 11.32 yuan after the developer said net income increased 35 percent in the first half.

Recent statements from the China Securities Regulatory Commission signal financing policies for property companies may be relaxed in the future, the China Securities Journal reported today on its front page, citing an unidentified person.

Goldman Outlook

A CSRC spokesman said on June 28 China won’t approve initial public offerings, financing and restructuring of main assets for property developers which violated laws and regulations, according to the newspaper.

Liquidity in China is expected to tighten in the second half as the nation’s leaders have a higher tolerance for lower economic growth, according to Goldman Sachs Group Inc.

“Against this backdrop, listed companies and firms facing a potential shortfall or strain on working capital may be less well positioned than those with stronger balance sheets,” Goldman Sachs analysts including Ben Bei wrote in a report.

The bank cut Chinese material stocks to neutral and auto and metal companies to underweight, saying they are more “vulnerable” due to higher leverage and lower profitability. Telecom stocks were raised to neutral, while transport shares were upgraded to overweight, Goldman Sachs wrote.

Zijin Mining Group Co., China’s largest gold producer, added 2.7 percent to 2.64 yuan. Shandong Gold Mining Co., the second biggest, climbed 6.6 percent to 23.36 yuan.

Gold climbed for a fourth day to the highest level in more than two weeks after Bernanke backed sustained stimulus for the foreseeable future. Minutes of the Fed’s June 18-19 meeting released yesterday showed many officials wanted to see more signs that employment is improving before backing a trim to bond buying.

The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, added 0.2 percent in New York yesterday.