China Stocks Extend 10-Week High on Materials, Ports

China’s benchmark stock index extended a 10-week high after material producers and port operators rallied. Drugmakers and technology companies fell.

Shanghai International Port (Group) Co. surged 10 percent, adding to a 95 percent gain since the Ministry of Commerce issued a statement on Aug. 22 reiterating approval of the city’s free-trade zone, which was given by the State Council on July 3. Rising Nonferrous Metals Share Co. paced a rally for rare earth producers. Yonyou Software led declines for technology companies, the best-performing industry group in 2013. A measure of health-care companies pared this year’s gains to 23 percent, dragged down by Kangmei Pharmaceutical Co.’s 1.9 percent loss.

The Shanghai Composite Index rose 0.2 percent to 2,127.62 at the close, adding to yesterday’s 1.2 percent gain. Investors are rotating into cyclical companies such as materials as the economy improves, Bank of Communications Co. said in a note today. HSBC Holdings Plc and Markit Economics’ services gauge rose to 52.8 last month from July’s 51.3, a report today showed.

“Economic data doesn’t seem to pose a problem so there are fewer risks now,” said Xu Shengjun, analyst at Jianghai Securities Co. in Shanghai. “The market isn’t doing much today because it’s digesting yesterday’s gains but sentiment’s still positive.”

The Shanghai index has climbed 9.1 percent since reaching this year’s low on June 27, spurred by signs the economy is stabilizing. An official report released over the weekend showed a manufacturing gauge climbing to a 16-month high in August. Data yesterday showed the government’s services index at 53.9 in August, above the level that indicates expansion.

Rare Earth

The CSI 300 Index retreated 0.2 percent to 2,350.70, while the Hang Seng China Enterprises Index slid 0.2 percent. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. added 2.6 percent in New York yesterday.

A gauge of material producers in the CSI 300 rose 0.8 percent, the biggest gain among 10 industry groups, followed by energy. They are the worst-performing industries this year with losses of at least 22 percent.

“The rotation into late-cycle industries has begun,” Hao Hong, Hong Kong-based equity strategist at Bank of Communications, wrote in the note, referring to industries such as energy, industrials and materials. “The necessary conditions for a bull market are improving growth prospects, cheap valuation, depressed sentiment and liquidity. The first three conditions have been met.”

Rising Nonferrous Metals jumped 4.1 percent to 48.70 yuan. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. advanced 0.7 percent to 29.46 yuan. The Ministry of Industry and Information Technology will start a check of rare earth exploration, smelting and trading companies, the Economic Information Daily reported, citing an unidentified person from ministry.

Trade Zones

China, supplier of 90 percent of the world’s rare earths, has curbed output and exports since 2009, when quotas were set to conserve resources and protect the environment.

Shanghai International Port advanced 10 percent to 4.97 yuan. Tianjin Port Co. gained 4.5 percent to 7 yuan. Shanghai’s Free-Trade Zone, which was approved by the State Council in August and may open as early as the end of this month according to the Shanghai Securities News, is part of Premier Li’s drive to shift the economy toward services and sustain long-term growth.

A measure of health-care companies in the CSI 300 fell 1.1 percent. Kangmei Pharmaceutical dropped 1.9 percent to 18.98, while Hualan Biological Engineering Inc. declined 1.9 percent to 26.69 yuan.

A sub-index of technology companies in the CSI 300 slipped 1.2 percent, paring its gains this year to 42 percent. Yonyou retreated 2.4 percent to 13.37 yuan. Chengdu Dr Peng Telecom & Media Group Co. slid 2.4 percent to 14.97 yuan.

Growth Outlook

Today’s HSBC services reading was the highest since March’s 54.3, as growth in business activity at service providers picked up to a five-month high.

President Xi Jinping said China’s slower economic growth this year was a conscious choice by the government to allow it to adjust the nation’s economic structure.

China would “rather bring down the growth rate to a certain extent in order to solve the fundamental problems” hindering long-run development, Xi said in an interview yesterday, according to a transcript distributed by the official Xinhua News Agency.

Trading volumes in the Shanghai index were 30 percent higher than the 30-day average today, according to data compiled by Bloomberg. It’s valued at 8.6 times its projected 12-month earnings, compared with the five-year average of 12.6 times, according to data compiled by Bloomberg.

(Corrects date of when Shanghai free-trade zone was approved in second paragraph.)
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