China’s Stocks Rise to 15-Month High as Defense Shares Lead Gain

China’s benchmark stock index rose to a 15-month high, led by defense and technology companies, amid speculation the government will increase military spending as part of its efforts to bolster economic growth.

China Spacesat Co. and Aerospace Communications Holdings Co. rallied 10 percent. President Xi Jinping called for more innovation in the country’s armed forces and a new strategy for “information warfare,” the official Xinhua News Agency reported Aug. 31. Liquor makers Kweichow Moutai Co. and Wuliangye Yibin Co. paced gains for consumer companies most immune to swings in the economy. Hong Yuan Securities Co. led a rally for brokerages, with a 6.5 percent advance.

The Shanghai Composite Index climbed 1.4 percent, its third straight gain, to 2,266.05 at the close, the highest level since June 5, 2013. Speculation is growing that the government will increase support for strategic industries after an official gauge of the nation’s manufacturing expanded at a slower pace last month. Defense spending will remain a priority given China’s territorial disputes with several neighboring countries, according to Citigroup Inc.

“Military stocks are leading the surge in the index,” said Zhang Yanbing, an analyst at Zheshang Securities in Shanghai. “Investors are optimistic about the industry’s reform. This is a big boost especially because related stocks are pretty huge state enterprises.”

The CSI 300 Index gained 1.3 percent to 2,386.46. The Hang Seng China Enterprises Index added 0.1 percent. Trading volumes in the Shanghai index were 20 percent above the 30-day average. U.S. financial markets were shut for a holiday.

Defense, Consumer

China Spacesat rose to a record high, while Aerospace Communications Holdings rallied to the highest level since 2008.

Xi said China must “strive to establish a new military doctrine, institutions, equipment systems, strategies and tactics and management modes” for information warfare, according to Xinhua. A campaign to erode the postwar preeminence of the U.S. military and its allies in the Asia-Pacific region, partly through asserting claims over island groups in the East and South China Seas, has exposed the need for enhanced aviation capabilities.

The nation’s military budget may grow at a compound annual rate of 11.6 percent during 2014-2016 and reach 1 trillion yuan by 2016, Citigroup analysts Alex Chang and Eric Lau wrote in a note dated July 25.

A gauge of consumer-staples producers in the CSI 300 rose 1.5 percent. Kweichow Moutai and Wuliangye Yibin both rallied more than 2 percent.

Confidence among liquor dealers is recovering as mass consumption is picking up, Shenyin & Wanguo Securities Co. analyst Deng Jingdong wrote in a note today. The liquor industry has already reached bottom and is seeing a recovery, he said.

Services Data

Yesterday’s data follow weaker-than-expected credit, production and investment data for July, suggesting the economy is losing momentum and adding to pressure on the government to step up efforts to meet its expansion target this year.

Official and private gauges of China’s services trade for August will be released tomorrow. The government’s non-manufacturing Purchasing Managers’ Index fell to 54.2 in July from 55 in June. The July reading for an index by HSBC Holdings Plc and Markit Economics came in at 50 in July, the lowest since the series began in November 2005 and down from 53.1 in June. A reading above 50 indicates expansion.

The Shanghai Composite has rebounded 14 percent since mid-March on prospects China will reduce government ownership of state-owned enterprises and the link between exchanges in Hong Kong and Shanghai will fuel inflows.

The Hang Seng China AH Premium Index of dual-listed companies gained 1.1 percent to 94.51 today, the most since July 28, signaling a narrower discount on mainland shares.

Bourses Link

PetroChina Co., the largest oil company, slid 0.5 percent in Hong Kong and advanced 0.5 percent in Shanghai.

The A-share market provides better opportunites with investors able to access consumer-discretionary, industrials and health-care shares, while financials and telecom dominate H-share opportunities, Robert Buckley, Aviate Global LLP’s managing partner for Asia, wrote in a report. “Unique” A shares include Kweichow Moutai and Gree Electric Appliances Inc., while companies with discounted A shares include PetroChina, Industrial & Commercial Bank of China Ltd. and Anhui Conch Cement Co., he said.

ICBC, the biggest lender, fell 0.8 percent in Hong Kong and advanced 1.2 percent in Shanghai. The China Banking Regulatory Commission has urged banks to speed up bad-loan writeoffs, Wang Zhaoxing, vice chairman at the regulator, wrote in an article published in China Finance magazine. Caixin reported the nation’s four-biggest banks provided 125 billion yuan in new loans in the August 1-28 period as deposits plunged.