Shanghai Stocks Rise to Five-Year High as Hong Kong Shares Rally

China’s Shanghai Composite Index climbed to the highest level since January 2010 and Hong Kong shares jumped the most in a year amid speculation that government steps to spur lending will bolster economic growth.

China Life Insurance Co. and Ping An Insurance (Group) Co. rallied more than 7 percent to lead gains for financial shares in Hong Kong. Poly Real Estate Group Co. surged 10 percent as developers jumped the most among industry groups in Shanghai. The People’s Bank of China will include savings held by lenders for non-deposit-taking financial institutions into bank deposits from 2015, the official Xinhua news agency reported.

“Expectations of loosening liquidity conditions may further boost market sentiment,” China International Capital Corp. strategists led by Hanfeng Wang wrote. “Some media reported the central bank had issued a document to reclassify banks’ deposits, so that they were not required to set aside reserves for interbank deposits, which may make expectations for liquidity condition loosening more visible.”

The Hang Seng China Enterprises Index climbed 4 percent to 12,019.75 at the close, the biggest gain since Nov. 18, 2013. Hong Kong’s stock market was shut the last two trading days of last week for the holidays, when the Shanghai Composite surged 6.2 percent. The Shanghai gauge advanced 0.3 percent to 3,168.02 today.

The Hang Seng Index rose 1.8 percent. The CSI 300 Index gained 0.3 percent, while the ChiNext index of small-cap shares slumped 2.4 percent. The H-shares gauge has climbed 11 percent this year, compared with a 50 percent rally for its Shanghai counterpart. The H measure is valued at 7.9 times 12-month projected earnings, compared with 12 for Shanghai, according to data compiled by Bloomberg.

PBOC Measures

The Shanghai index rose as much as 2.1 percent today and fell as far as 1 percent with 30-day volatility surging to a five-year high. Trading volumes were 19 percent above the 30-day average, according to data compiled by Bloomberg.

“The fundamentals haven’t changed, confidence hasn’t left and the bull market will continue,” said Zhou Lin, an analyst at Huatai Securities Co.

The PBOC will temporarily waive the reserve requirement for such deposits and will help lower banks’ loan-to-deposit ratio, according to Xinhua. The measures are seen as another move to replace a universal reserve-requirement ratio cut that the central bank needs to boost credit and bolster the economy. Concerned that a broad reduction might send out a strong easing signal and bring turmoil to stock markets, the central bank has added liquidity by stealth at least four times in the past four months.

HK Stocks

In Hong Kong, insurers led gains. China Life rose 8.7 percent. China Pacific Insurance Group surged 12 percent, while New China Life Insurance Co. soared 11 percent. The H-shares gauge may reach 13,000 next year, according to the median of 12 analysts’ estimates compiled by Bloomberg. Six out of nine brokerages listed Ping An Insurance as a top pick. Citic Securities Co. rallied 3.2 percent after the biggest Chinese brokerage said it plans to sell up to 1.5 billion shares.

“Further easing of policy may benefit the investment environment,” boosting investment income for insurers, said Dickie Wong, an executive director of research at Kingston Financial Group in Hong Kong. “I expect a further cut to the reserve-requirement ratio or interest rates, giving a boost to Chinese financial shares.”

A measure of property stocks in the Shanghai gauge surged 5.7 percent. Gemdale Corp. added 5.3 percent. Shanghai Jinqiao Export Processing Zone Development Co. jumped for a fourth day, adding 5.8 percent after the government said it would expand the city’s free-trade zone to the Jinqiao and Pudong districts.

Profits Drop

China’s industrial profits fell the most in two years last month, the latest data to show a deepening slowdown in the world’s second-biggest economy.

Total profits of industrial enterprises in November dropped 4.2 percent from a year earlier, the National Bureau of Statistics said Dec. 27. That follows October’s 2.1 percent decline and is the biggest slide since August 2012, when profits slumped 6.2 percent. Mired in industrial overcapacity, factory-gate deflation and a housing slump, China is headed for its slowest full-year economic expansion since 1990.

The industrial profits data “indicated price weakness is taking its toll on profits,” CICC’s Wang wrote in the report dated today. “The real economy is in need of more monetary policy loosening measures.”

SOE Reform

Beijing GeoEnviron Engineering & Technology Inc. and Guosen Securities Co. both jumped 44 percent in their mainland share debuts. The brokerage said earlier this month it planned to raise at least 6.84 billion yuan ($1.1 billion) by selling up to 1.2 billion shares in its IPO.

PetroChina Co. gained 2.1 percent in Shanghai and rose 1.9 percent in Hong Kong. The Chinese government raised the threshold for a petroleum windfall tax to $65 per barrel. CICC said the change will boost PetroChina’s earnings.

China may announce reforms of state-owned enterprises before the lunar new year, which starts in mid-February, the Securities Journal reported, citing Chu Xuping, head of the research center of the State-owned Assets Supervision and Administration Commission. The government should retain over 51 percent ownership in most important state-owned enterprises, Chu was cited as saying.

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