Hong Kong Stocks Rise as Policy Speculation Tempers PMI

Hong Kong stocks gained, with a rally in the last hour capping the Hang Seng Index’s longest streak of gains in more than a month, as a weaker-than-estimated manufacturing report was countered by speculation the government will do more to support growth.

Zhuzhou CSR Times Electric Co. led railway companies higher for a second day. Insurer AIA Group Ltd., added 1.8 percent as it prepares to announce earnings this week. PetroChina Co., the nation’s No. 1 energy producer, slumped 2 percent after a survey of purchasing managers by HSBC Holdings Plc and Markit Economics showed a manufacturing slowdown worsening.

The Hang Seng Index increased 0.2 percent to 21,968.93 at the 4 p.m. close in Hong Kong, after falling as much as 0.5 percent and rising 0.1 percent. The Hang Seng China Enterprises Index of mainland shares, which surged 3.9 percent yesterday, was little changed at 9,778.51 after falling as much as 1.2 percent and gaining 0.2 percent.

“After the PMI announcement, investors became more confident that China’s central government may impose stimulus measures in the short term,” said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong Ltd. “We expect data will continue to show declining economic growth in China. The trend won’t reverse in the short term.”

About five companies increased for every three that retreated on the 50-member Hang Seng Index. Volume on the measure was 34 percent less than its 30-day intraday average.

The Hang Seng Index is down 3.3 percent this year through yesterday, the third-worst performance among major developed markets after Greece and Austria, as shares slid on signs China’s growth is slowing and amid concern the Federal Reserve will taper its stimulus.

Factory Activity

Shares on the city’s benchmark gauge traded at 10.5 times estimated earnings yesterday, compared with 15.4 times for the Standard & Poor’s 500 Index and 13.4 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

China’s manufacturing is weakening further in July, according to a preliminary survey of purchasing managers. The reading of 47.7 for an index released today by HSBC Holdings Plc and Markit Economics, was less than estimated and if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction.

“As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilize growth,” said Hongbin Qu, chief China economist and co-head of Asian economic research at HSBC.

Growth Floor

Zhuzhou CSR increased 4.3 percent to HK$21.85 as UBS AG analyst Richard Wei said the company will post a sequential rebound in earnings in the second quarter.

China Railway Group rose 3.4 percent to HK$4.25, while CSR Corp., the country’s biggest trainmaker, gained 2.1 percent to HK$5.32. Railway related stocks jumped yesterday after China Business News reported the government may increase investment for railway construction this year.

Premier Li Keqiang said China’s “bottom line” for gross domestic product growth is 7 percent and the nation can’t let growth go below that, Beijing News reported yesterday, citing comments at a recent meeting with economists and businesspeople. The “lower limit” for China’s GDP growth is 7.5 percent, Li was cited as saying.

“China’s central government already mentioned about minimum growth,” said Masahiko Ejiri, a Tokyo-based senior fund manager at Mizuho Asset Management Co., which oversees the equivalent of $34 billion. “If the economy continues to slow down it would mean the government has to provide more stimulus for the economy. There’s concern they may spend the stimulus in a very inefficient way.”

Materials and energy companies led declines this year on the Hang Seng Composite on concern demand will weaken amid slower growth in China’s economy. Gauges of information technology, utilities and services were the only measures that rose among the index’s 11 industry groups.

The Hang Seng China Enterprises Index, also known as the H-share index, fell as much as 27 percent from a Feb. 1 high, meeting some investors’ definition of a bear market. The measure, which has since rebounded 10 percent, traded at 1.18 times the value of net assets yesterday, 34 percent lower than it five-year average of 1.78.

U.S. Stocks

Futures on the S&P 500 increased 0.2 percent today. The U.S. equity index dropped 0.2 percent yesterday in New York, as investors weighed corporate earnings amid speculation on when the Federal Reserve may scale back its asset purchases. The Richmond Fed’s gauge of manufacturing in the mid-Atlantic region unexpectedly fell to minus 11 in July.

Hang Seng Index futures increased 0.3 percent to 21,965. The HSI Volatility Index slid to 17.51, the lowest since June 4, indicating traders expect a swing of 5 percent for the equity benchmark in the next 30 days.

“Most investors will not increase their share holdings right now,” said Pang. “After the sharp increase yesterday, they are still waiting to see if there will be any stimulus by the government and whether banks’ reserve ratio will be cut.”

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