China’s Stocks Rise as Small Companies Rally on Lending Reform

China’s stocks rose for the first time in four days as investors speculated looser interest-rate controls will benefit smaller companies, overshadowing concern banks’ lending margins will shrink.

Goertek Inc., an Apple Inc. supplier, led a gauge of technology companies to the biggest advance among industry groups, while the ChiNext index of smaller companies surged 3.4 percent. Bank of Communications Co. and Bank of Beijing Co. fell at least 1.3 percent after the People’s Bank of China ended a floor on borrowing costs while keeping a cap on deposit rates.

The Shanghai Composite Index added 0.6 percent to 2,004.76 at the close, erasing a loss of as much as 1.1 percent. The removal of China’s interest-rate floor may make higher-yielding loans to small companies more attractive for banks as they seek to bolster net interest margins, according to Tang Yonggang, an analyst at Hongyuan Securities Co. in Beijing.

Lenders “will turn to smaller companies for profits and offer more attractive packages to them,” Tang said.

The CSI 300 Index advanced 0.5 percent, while the Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong slipped 0.5 percent. The Shanghai Composite has fallen 12 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.

Technology Stocks

China’s central bank ended a floor on borrowing costs previously set at 30 percent below the benchmark, it said July 19. The limit on mortgage rates will stay to curb property speculation, the PBOC said. Also unchanged was a 10 percent limit on what banks can offer over PBOC-set deposit rates.

While banks may suffer because of the lending changes and their losses may drag on the broader stock market, this could be offset by gains for other industries which benefit from lower rates, according to Hao Hong, Hong Kong-based head of China research at Bank of Communications.

A measure of technology companies in the CSI 300 rose 3.4 percent, the most among the industry groups. Goertek surged 3.1 percent to 36.19 yuan. Sanan Optoelectronics Co. advanced 2.5 percent to 22.67 yuan. Nationz Technologies Inc., a chip designer listed in the ChiNext, jumped 10 percent to 19.58 yuan.

Only 3 percent of China’s 42 million small- and medium-sized firms currently borrow from banks, according to Citic Securities Co., a Beijing-based brokerage.

Among large companies, PetroChina Co. gained 0.8 percent to 8.08 yuan and Jiangxi Copper Co. climbed 2 percent to 15.99 yuan.

Banks Drop

A measure of health-care companies in the CSI 300 gained 2.3 percent, the second most among the industry groups. Kangmei Pharmaceutical Co. rallied 3.6 percent to 20.58 yuan.

Investors should buy drugmakers and consumer-staples companies in the second-half of the year, according to Shenyin & Wanguo Securities Co. Risk premiums for China’s stocks will rise as capital costs increase amid liberalization of interest rates, while the clean-up of local government financial vehicles and shadow banking increases the risk of swings in the economy, said Shenyin & Wanguo, ranked first for China equity strategy research by New Fortune magazine last year.

Bank of Communications lost 1.3 percent to 3.79 yuan. Bank of Beijing lost 1.6 percent to 7.39 yuan. Poly Real Estate Group Co., the second-biggest developer, fell 2 percent to 9.98 yuan. China Vanke Co., the largest, slid 1.2 percent to 9.45 yuan.

Before last week’s move, China regulated how much banks can pay to depositors and how much they could charge borrowers, ensuring a profit margin for lenders. Banks are allowed to offer up to 10 percent above the official deposit rate, currently at 3 percent, and before the limits were removed could issue loans at as much as 30 percent less than the benchmark 6 percent rate.

Trading Drops

The practice led to lending to unprofitable projects and the growth of unregulated banking that policy makers say increases risks in the financial system. Premier Li Keqiang, who took office in March, is accelerating financial reforms to revive the economy after gross domestic product growth slowed to 7.5 percent in the second quarter.

Trading volumes on the Shanghai index were 12 percent lower than the 30-day average today, data compiled by Bloomberg show. The measure’s 30-day volatility was at 27 on July 19, the highest since December 2010, data show. The Bloomberg China-US 55 Index rose less than 0.1 percent in New York on July 19.

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