China’s Stocks Rally Most Since 2009 as Financials Lead Rebound

Chinese stocks posted the biggest two-day rally since 2009, led by financial companies, as investors speculated Monday’s rout was overdone given prospects for further monetary stimulus.

China Life Insurance Co., Bank of China Ltd. and Haitong Securities Co. soared more than 9 percent. Poly Real Estate Industry Group. led a rally for developers, surging 6.8 percent. PetroChina Co., the biggest oil company, jumped 7.3 percent. Budget carrier Spring Airlines Co. and three other companies jumped 44 percent in their first day of trading.

The Shanghai Composite Index rallied 4.7 percent to 3,323.61 at the close, adding to yesterday’s 1.8 percent advance. The gauge plunged 7.7 percent on Monday after regulators suspended three brokerages from lending to new equity-trading clients. The stocks reversal drove a measure of 10-day volatility to the highest level since 2008.

“It looks like some new investors are taking advantage of the big decline on Monday to buy,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “The market over-reacted to the news of a crackdown on margin trading.”

The CSI 300 Index surged 4.5 percent. Hong Kong’s Hang Seng China Enterprises Index advanced 2.4 percent. The Hang Seng Index gained 1.7 percent. The Bloomberg China-US Equity Index fell 0.8 percent in New York yesterday. Trading volumes in the Shanghai index were six percent below the 30-day average, according to data compiled by Bloomberg.

Financial Rally

Stocks rebounded after China’s securities regulator said it isn’t trying to curb equity trading. Citic Securities Co., Haitong Securities and Guotai Junan Securities Co. were suspended from lending money and stocks to new clients for three months, the China Securities Regulatory Commission said on Jan. 16. The regulator punished nine other brokerages for offenses including allowing unqualified investors to open margin finance and securities lending accounts, it said.

A gauge of financial companies in the CSI 300 surged 6.5 percent, the most among 10 industry groups. The measure had fallen 11 percent in the previous two days. Citic Securities gained 7.7 percent, paring this year’s loss to 15 percent. Haitong Securities climbed 10 percent, trimming the 2015 decline to 14 percent.

“Brokerages seem to have been oversold,” said Ryan Huang, Singapore-based market strategist at IG Asia Pte Ltd.

Divided Outlook

Outstanding margin loans on both the Shanghai and Shenzhen exchanges surged more than tenfold in the past two years to a record 1.1 trillion yuan as of Jan. 16, or about 3.5 percent of the nation’s market value. On the New York Stock Exchange, margin debt amounts to about 2.1 percent of market cap on the NYSE Composite Index.

“We would suggest that the regulator is not trying to reverse the bull trend in the overall market,” Jonathan Garner and Laura Wang, strategists at Morgan Stanley, wrote in a report. “The A-share bull run is intact although it is likely to proceed at a slower pace from here on out.”

The People’s Bank of China will ease monetary policies in the next few months, Goldman Sachs Group Inc. analysts said in a report yesterday after data showed 2014’s economic growth fell short of the government’s target.

The Shanghai Composite has gained 65 percent over the past year, making it the best performer among 93 global indexes tracked by Bloomberg. The index is valued at 12.7 times 12-month projected earnings, compared with a multiple of 8 for the H-shares gauge.

Rising Volatility

“The stock market is not yet conspicuously expensive,” Simon Cox, Asia Pacific investment strategist at BNY Mellon Investment Management told Bloomberg Television. “There is underlying strength in the market and it won’t simply retrench even though regulators stepped in.”

China’s world-beating stock rally is over, according to the latest Bloomberg Global Poll. Fifty-eight percent of the survey’s 481 respondents said the Shanghai Composite will either decline or remain little changed over the next six months after posting a 55 percent advance since June. Only 30 percent said the gauge will extend gains.

The one thing China’s bulls and bears can agree on is that swings in the world’s most-volatile major stock market are only going to get bigger after equity traders took on record amounts of debt.

Both Bank of America strategist David Cui, who predicts Chinese shares will fall, and JPMorgan Chase & Co.’s Adrian Mowat, who has an overweight rating, say the surge in margin lending to all-time highs is amplifying price fluctuations in the $4.9 trillion market. Volatility in the benchmark Shanghai Composite reached the highest level since 2009 this week after rising more than fourfold since July.

Spring Airlines, the first initial public offering of a Chinese airline since 2002 to help meet surging demand in Asia’s largest economy, opened at 26.15 yuan, up from the 18.16 yuan price in the IPO. The offering raised 1.8 billion yuan.

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