China’s Unwanted Lead Rebound From Bear-Market Rout

China’s most beaten-down stocks have turned into the biggest winners from government efforts to bolster confidence in the slumping economy.

Shares in the MSCI China Index with the most depressed valuations, steepest five-year losses and highest short interest have all outpaced the gauge’s 6 percent rally from an eight-month low on March 20 through yesterday, data compiled by Bloomberg show. Shui On Land Ltd., the Shanghai-based real estate company whose price-to-book ratio of 0.3 was the lowest in the MSCI index, jumped 13 percent while Anhui Conch Cement Co., the stock most shorted by investors, rebounded 14 percent.

Companies tied to infrastructure and property, among the biggest victims of weaker growth in the world’s second-biggest economy, rallied after policy makers accelerated construction projects and eased funding restrictions for financial companies. More pro-growth measures would have to be unveiled to extend the rebound, according to Zheshang Securities Co. and Societe Generale SA’s private bank.

“The ones with the worst fundamentals will rise the fastest because traders are coming in to punt the stocks,” said David Poh, the regional head of portfolio-management solutions at the private-banking unit of Societe Generale, which had about $116 billion under management as of December. “Everyone is trying to play the fact they are going to reform and do a bit more to stimulate the economy.”

Supporting Developers

The Bloomberg Index of the most-traded Chinese stocks in the U.S. gained for a third day yesterday, trimming its quarterly decline to 6.5 percent.

The Hang Seng China Enterprises Index of mainland stocks traded in Hong Kong climbed 0.2 percent at 9:58 a.m. local time, rebounding 9.7 percent since entering a bear market on March 20 with a 20 percent loss from a December peak. The MSCI China gauge ended March down 1.7 percent, extending its first quarterly drop since the April-to-June period to 5.8 percent.

China will speed up construction projects to support growth, the State Council said March 19, the same day that the securities regulator approved the first share sales by developers in about four years. The China Securities Regulatory Commission announced plans to expand financing options for banks and other major companies by allowing them to sell preferred stock on March 21.

Interest for beaten-down shares has also been driven by growing investor concern that valuations of the best-performing stocks, including those in the technology and services industries, are overstretched, according to Erwin Sanft, the head of China and Hong Kong equity research at Standard Chartered Plc.

‘Too Premature’

Tencent Holdings Ltd., which has the highest price-to-book ratio in the MSCI China index, retreated 3.3 percent from March 20 through yesterday after posting profit that trailed analyst estimates. The 20 stocks in the 140-member MSCI China gauge with the lowest price-to-book ratios have climbed 7.5 percent on average since March 20, versus a 1.4 percent gain for the most expensive shares, according to data compiled by Bloomberg.

Those with the highest short interest -- or the proportion of shares borrowed and sold to profit from lower prices -- gained 7.2 percent on average, more than double the advance in the least-shorted shares. Stocks that fell the most during the past five years rallied 6.1 percent, versus 5.1 percent for the best performers.

“It’s too premature to say this is a bull market,” said Zhang Yanbing, an analyst at Zheshang Securities Co. in Shanghai. “Such a rally may not continue as it’s really dependent on the upcoming economic data.”

Manufacturing Data

Premier Li Keqiang is under pressure to take steps to address weakening economic expansion amid deepening concern that the nation will miss its 7.5 percent growth target this year, the weakest annual pace since 1990. The median estimate for first-quarter expansion dropped to 7.4 percent in March from 7.6 percent in February, according to Bloomberg News surveys of analysts. For the full year, the median forecast slid to 7.4 percent.

China’s official Purchasing Managers’ Index rose to 50.3 in March, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing. That compared with February’s 50.2 reading and the 50.1 median estimate of 35 analysts in a Bloomberg News survey. Numbers above 50 signal expansion.

A separate PMI from HSBC Holdings Plc and Markit Economics came in at 48, versus a previous estimate of 48.1 and down from 48.5 in February.

“There are genuine concerns on China’s slowdown,” said Daphne Roth, the Singapore-based head of Asian equity research at ABN Amro Private Banking. “You still need to be selective. You can’t just go in and buy the beaten-down stocks.”

She favors Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., both of which reported earnings that topped analyst estimates last month, while saying she has concerns about raw-material producers and industrial companies. ICBC, China’s largest lender, has climbed 9.9 percent since March 20 while China Construction Bank rose 10 percent.

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