Shanghai Composite Heads for Best Month Gain Since 2012

Chinese energy stocks surged after the Communist Party announced a high-level corruption probe, while developers slumped. The benchmark share index, which posted its steepest monthly gain since 2012, was little changed.

PetroChina Co., the nation’s biggest oil producer, rose 3.1 percent. Investors should buy the shares as a probe into former parent company head Zhou Yongkang signals an anti-graft campaign is close to coming to an end, Citic Securities Co. said. China Petroleum & Chemical Corp., the largest refiner, climbed to a one-month high. Poly Real Estate Group Co. slumped 5.5 percent to drag down property developers.

The Shanghai Composite Index retreated 0.1 percent to 2,181.24 at the close, halting six days of gains. China’s investigation into Zhou, also the former security czar, is positive for investor sentiment as it allows the government to now focus on economic issues and reignites hope for reforms, according to Bank of America Corp.

“The Zhou investigation is positive for the market as investors feel risk is lowered and uncertainty is removed,” said Mao Sheng, an analyst for Huaxi Securities Co. in Chengdu. “This will also boost the energy sector, which Zhou was in for a long period of time.”

The CSI 300 Index dropped 0.4 percent, while the Hang Seng China Enterprises Index slipped 0.2 percent at 3:40 p.m. The Bloomberg index of the most-traded Chinese shares in the U.S. fell 0.7 percent yesterday, halting a seven-day rally. Trading volumes in the Shanghai Composite were 65 percent above the 30-day average, according to data compiled by Bloomberg.

Profit Taking

The Shanghai index surged 6.5 percent in July, capping the biggest monthly advance since December 2012, amid optimism the government will achieve its economic-growth target for this year after accelerating railway spending, allowing cities to loosen property curbs and cutting reserve-requirement ratios for some lenders. The measure has gained 3.1 percent this year.

“It is likely that we see some short-term downward pressure in the coming days as investors are likely to want to cash in the recent rally but the overall trend seems to remain positive,” Gerry Alfonso, a trader at Shenyin & Wanguo Securities Co., said by e-mail from Shanghai today.

PetroChina rose to the highest level in seven months. The shares will see a valuation recovery, Citic Securities analysts Huang Lili and Zhang Xixi wrote in a report today. PetroChina trades at 9.9 times projected 12-month earnings, compared with the three-year average of 11 times, according to data compiled by Bloomberg. Jefferies Group LLC said the corruption investigation will unlock shareholder value.

Sinopec advanced 1.2 percent. A gauge of energy producers in the CSI 300 gained 1.6 percent, the most among 10 industry groups.

Reform Shift

The Zhou investigation is the highest level corruption probe of the Communist Party’s 65 years in power. A member of the party’s most powerful Politburo Standing Committee until November 2012, Zhou had not been seen in public since October. He was an ally of Bo Xilai, the ex-Chongqing party secretary who was convicted of bribery and abuse of power and sentenced to life behind bars last year.

“Markets had put much hope on reforms in November last year post the release of the grand reform agenda of the 3rd Plenum, but the hope was soon dampened as it became apparent that the new government’s top agenda was an all-out anti-corruption campaign,” Lu Ting, Bank of America’s economist, wrote in a report. “With some high-profile arrests under its belt, we believe the focus of the new government can start to shift from the anti-graft campaign to real institutional reforms, which are badly needed for China’s long-term economic health.”

JPMorgan Upgrade

The Shanghai property gauge dropped 2.2 percent. The measure entered a bull market yesterday, rising more than 20 percent from this year’s low on March 10. Poly Real Estate, the second-biggest developer, slumped 5.5 percent. China Vanke Co., the largest, retreated 3.7 percent.

JPMorgan upgraded Chinese stocks to neutral from underweight, citing the scale of monetary stimulus since June, strategists led by Adrian Mowat wrote in a report dated yesterday.

China’s central bank presided over a bigger-than-estimated surge in new credit in June and has cut reserve requirements for some lenders, while local media reported the PBOC set up a 1 trillion yuan ($162 billion) lending facility with the China Development Bank to fund housing projects.

Chinese shares will rally through October amid “strong” third-quarter economic growth and speculation on the impact of the Shanghai-Hong Kong exchange link, Mowat wrote.

An official gauge of manufacturing growth probably advanced to an eight-month high in July, a Bloomberg News survey of economists showed before data due tomorrow. The official Purchasing Managers’ Index for manufacturing was probably at 51.4 in July, the highest since November, according to the median estimate in the Bloomberg survey.

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