China’s Stocks Advance Most in Week on Manufacturing Growth

China’s stocks rose the most in a week after manufacturing unexpectedly strengthened last month and the government pledged to prevent economic growth from slipping below a “reasonable” level.

Jiangxi Copper Co. and China Shenhua Energy Co. led gains for metal and energy shares after the government’s Purchasing Managers’ Index jumped to 50.3, above the level of expansion. Hebei Iron & Steel Co., the biggest steelmaker’s listed unit, rose 2.2 percent after the National Business Daily said China may cut almost half of steel output to curb overcapacity. Poly Real Estate Group Co. and Ping An Bank Co. paced an advance for financial shares after home prices rose and money rates fell.

The Shanghai Composite Index advanced for a third day, climbing 1.8 percent to 2,029.07 at the close. The unexpected gain in manufacturing suggests a slowdown in the world’s second-largest economy may be stabilizing as the government rolls out targeted measures to support growth.

“The PMI figure looks like a big slump in growth can be avoided,” said Dai Ming, a money manager who helps oversee $19 million at Hengsheng Hongding Asset Management Co. “The government keeps rolling out measures to stabilize economic growth but the market still has doubts whether such growth can be sustained into next year.”

The CSI 300 Index surged 2.4 percent to 2,245.36. The Hang Seng China Enterprises Index gained 0.7 percent. The Bloomberg China-US 55 Index added 0.3 percent in New York yesterday.

The official PMI compared with the 49.8 median forecast of 35 analysts in a Bloomberg News survey and June’s 50.1 level. Another manufacturing index released by HSBC Holdings Plc today was at 47.7 in July. Readings above 50 indicate expansion.

Commodity Producers

A gauge of energy producers in the CSI 300 jumped 2.7 percent, the second-biggest gain among 10 industry groups. Shenhua, the biggest coal producer, climbed 0.8 percent to 16.13 yuan. Jiangxi Copper, the largest producer of the metal, surged 2.3 percent to 15.89 yuan. Aluminum Corp. of China Ltd., the listed unit of nation’s biggest maker of the lightweight metal, rose 1.3 percent to 3.14 yuan.

Improvements at manufacturers would help Premier Li Keqiang achieve the year’s 7.5 percent expansion goal as he tries to support the economy with tax breaks for small companies and reduced fees for exporters. Leaders pledged at a Politburo meeting this week to maintain steady second-half growth while pressing on with economic reforms.

State Council

China can’t allow growth to decelerate to a level out of the reasonable zone, the State Council said in a statement.

The nation “can’t blindly stimulate economic growth, nor can it allow economic growth to decelerate to a level out of the reasonable zone,” the State Council Information Office said.

China will build subways and light rails, the State Council said in a separate statement yesterday. The cabinet also studied outsourcing some public services, according to the statement. No details were given on which services.

“We believe the announcement to purchase public services from non-government entities is a new idea in the right direction, as it helps to open up a monopolized sector to private investment,” Zhang Zhiwei, economist at Nomura Holdings Inc., wrote in a note to clients.

Hebei Steel added 2.2 percent to 1.87 yuan. China may cut almost half of the total 970 million tons of steel output, the National Business Daily said, citing an unidentified person who saw a draft plan from the National Development and Reform Commission and the Ministry of Industry and Information Technology.

Home Prices

China Vanke Co., the biggest developer, rose 2.3 percent to 9.74 yuan. Poly Real Estate, the second largest, added 3.4 percent to 10.54 yuan. Home prices surged 7.9 percent last month from a year earlier, said SouFun Holdings Ltd., the nation’s biggest real estate website owner. The price jump was the most since December.

Ping An Bank advanced 3.4 percent to 9.92 yuan. Industrial Bank Co. climbed 2.3 percent to 9.27 yuan. China’s one-year interest-rate swaps fell to the lowest level in almost two weeks after the central bank injected cash into the financial system using reverse-repurchase operations.

The Shanghai Composite rose 0.7 percent last month after falling 14 percent in June. It’s down 11 percent this year on concern slowing growth will damp earnings. The measure trades at 8.2 times 12-month projected profit, compared with the five-year low of 8 times, data compiled by Bloomberg show.

‘Dysfunctional’ Market

Trading volumes in the Shanghai index were 4.9 percent lower than the 30-day average today, while 30-day volatility was at 26.3, near the highest level since December 2010, according to data compiled by Bloomberg.

China’s equity market has become “dysfunctional” after the regulator halted share sales and investors shifted to wealth-management products, said Anthony Neoh, a former government adviser who helped the nation open up to foreign money managers a decade ago.

Smaller companies are losing access to capital as the China Securities Regulatory Commission extends a more than nine-month halt on initial public offerings and government-controlled banks focus on lending to state-owned enterprises, said Neoh, who helped start the Qualified Foreign Institutional Investor program as the CSRC’s chief adviser from 1999 to 2004. Many investors assume wealth-management products are guaranteed by the government, creating “tremendous moral hazard,” Neoh said.

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