China’s Stocks Advance on Stimulus Bets as Banks Rebound

China’s stocks rebounded from the biggest loss in five years amid speculation the government will provide further stimulus to the economy after data showed inflation slowed more than estimated.

The Shanghai Composite Index climbed 2.9 percent to 2,940 at the close, after plunging 5.4 percent yesterday. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the nation’s two biggest lenders, rose at least 2.2 percent. Financial companies rallied, helping stocks extend gains in the afternoon, on prospects the government is injecting funds into the interbank market through China Development Bank, according to Cai Feng, a strategist at Guoyuan Securities Co.

“If this is true, it will provide liquidity for the market,” said Cai.

The Shanghai Composite has climbed 19 percent over the past month, the biggest gain among 93 global indexes, on speculation the central bank will cut reserve-requirement ratios after lowering interest rates for the first time in two years last month. Reserve ratios have remained unchanged at 20 percent for major banks and 18 percent for smaller banks since May 2012.

Stocks, bonds and the currency had tumbled yesterday, with the nation’s four biggest lenders slumping more than 9 percent, after policy makers said riskier bonds can no longer be used as collateral for some short-term loans.

The CSI 300 Index rebounded from yesterday’s 4.5 percent plunge, adding 3.7 percent. The Hang Seng China Enterprises Index erased losses, rising 0.4 percent. The Hang Seng Index advanced 0.2 percent.

Inflation Data

Guoyuan’s Cai said stocks rallied on speculation the People’s Bank of China injected as much as 400 billion yuan ($65 billion) into the interbank market via the development bank. The PBOC didn’t respond to a faxed request for comment. In September, the central bank started providing the five biggest banks with 100 billion yuan each through standing lending-facilities with a tenor of three months, Sina.com reported.

China Merchants Bank Co. rebounded from yesterday’s 6.6 percent loss, jumping 8.3 percent, while Bank of Beijing Co. added 5.4 percent.

“It is maybe not a surprise to see recent equity market strength being used as a backdrop to further improve the credit quality of the financial system, particularly as the Central Economic Work Conference has convened, during which the likelihood of further stimulatory announcements is high,” said Robert Buckley, the managing partner for Asia at equity brokerage Aviate Global LLP.

The conference sets the tone for macroeconomic policy for the next 12 months. The biggest decision from the meeting, which the official Xinhua News Agency said began yesterday, will likely be the 2015 growth target. That number will be announced at the start of the annual National People’s Congress in March.

Economic Concerns

Data today showed consumer prices rose 1.4 percent last month, compared with October’s 1.6 percent increase. Both the inflation rate and producer prices dropped more than forecast.

“The room for further targeted stimulus or easing in policies is clearly reinforced by the very low inflation figures that we are seeing,” said Gerry Alfonso, a China equity sales and trading director at Shenyin & Wanguo Securities Co. in Shanghai.

Gauges of consumer discretionary, utility and industrial companies climbed more than 5 percent for the biggest gains among 10 industry groups. Zhe Jiang Daily Media Group led a rally for media shares, surging 8.6 percent. SAIC Motor Corp., the biggest automaker, soared 7.4 percent. Chongqing Water Group Co. jumped by the 10 percent daily limit. China Railway Group Ltd. added 9.5 percent.

Price Swings

Volatility in stocks is increasing, with the Shanghai index swinging by more than 250 points yesterday, as investors assess the sustainability of a rally that has propelled share prices to the most expensive levels since 2011. The value of equities changing hands on mainland exchanges reached 1.24 trillion yuan yesterday, almost five times the one-year average.

“The market overall is in a bad shape right now, you have huge swings which are hard to predict,” said John-Paul Smith, founder of the London-based investment research firm Ecstrat.

Trading volumes in the Shanghai gauge today were 46 percent above the 30-day average as 10-day volatility reached the highest levels since September 2009. The index has rallied 39 percent this year through yesterday, compared with a 3.9 percent drop for the MSCI Emerging Markets Index.

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