China Stocks Rise as Small Caps Complete Biggest Gain Since ’08

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China’s shares climbed, with a gauge of smaller companies capping its biggest advance in more than six years, as hundreds of stocks resumed trading and export data exceeded economists’ estimates.

The Shanghai Composite Index rose 2.4 percent to 3,970.39 at the close. The small-cap CSI 500 Index rallied 6.2 percent for its best gain since November 2008. The number of halted companies fell by 408 from Friday to 1,045, or 36 percent of overall listings on mainland exchanges. PetroChina Co. dropped 4.3 percent to lead losses by the nation’s largest firms after the energy producer jumped 24 percent in the past two weeks.

“Bargain hunters are focusing on small caps that were hit the most during the market rout,” Dai Ming, a fund manager at Hengsheng Asset Management Co., said in Shanghai. “The market doesn’t have too much interest in big companies. They were the outperformers in the market plunge.”

The Shanghai gauge has rebounded 13 percent in three days after unprecedented government intervention to end a rout that wiped almost $4 trillion of value. Officials last week banned major shareholders from selling shares for six months, ordered state companies to buy equities and allowed more than half of listed firms to suspend trading. The public security bureau is investigating the plunge and has found signs of stock market manipulation, the official Xinhua News Agency reported over the weekend.

‘Worst is Over’

The CSI 300 Index gained 2.6 percent at the close. The ChiNext index of smaller companies jumped 5.8 percent. Hong Kong’s Hang Seng China Enterprises Index and Hang Seng Index both added 1.2 percent.

Margin traders increased holdings of shares purchased with borrowed money for the first time in 15 days on the Shanghai Stock Exchange Friday. The outstanding balance of margin debt on the nation’s two bourses dropped by $133.9 billion from the peak on July 8 to $231.2 billion through Thursday.

Most of speculative margin financing has largely been wiped out in the China market correction, Francis Cheung, a strategist at CLSA Ltd. in Hong Kong, said at a briefing in Hong Kong Monday. The “worst is over for now” for equities, he said.

Police have found signs that some firms had manipulated the trading of stock-market futures, Xinhua reported Sunday, without saying where it got the information. A team of investigators led by the Vice Minister of Public Security is continuing probes after arriving in Shanghai on Friday, Xinhua reported.

Foreigners sold a net 40.4 billion yuan ($6.5 billion) of Chinese shares via the Hong Kong and Shanghai exchange link in the five days through Monday, according to data compiled by Bloomberg.

Valuation Concerns

BlackRock Inc., UBS Group AG and Templeton Emerging Markets Group’s Mark Mobius say mainland stocks need to fall further before they’re worth buying. Even after the market selloff, the Shanghai Composite is 94 percent higher than it was 12 months ago. The gauge’s valuation is 50 percent above its five-year average, while the median price-to-earnings ratio on Chinese bourses is the most expensive among the world’s 10 largest markets.

“Valuations are still about double where they were last summer,” Russ Koesterich, the global chief investment strategist at BlackRock, which oversees about $4.8 trillion, said in a July 10 interview on Bloomberg Television. “Given the magnitude of the run-up, it is possible that even after a 30 percent correction, we haven’t gotten back to something approaching fair value.”

The recent rebound pared losses by the Shanghai Composite since its June 12 high to 23 percent. While the median price-to-earnings ratio in China has dropped to 60 from 108 at the height of the rally, valuations are three times as high as those on the Standard & Poor’s 500 Index.

Trade Data

More than 300 stocks rose by the daily limit on the CSI 500 gauge Monday. The index trades at 54 times reported earnings after sliding 43 percent from June 12 through July 8. Changjiang & Jinggong Steel Building (Group) Co. jumped 10 percent as shares resumed trading for the first time since last Tuesday. The stock had tumbled 58 percent from its June 11 peak.

PetroChina was the biggest drag on the Shanghai Composite. Industrial & Commercial Bank of China Ltd. sank 4.9 percent. China’s largest companies rallied in the last two weeks on speculation of state linked fund buying.

Great Wall Motor Co., China’s largest SUV maker, slumped 13 percent in Hong Kong after the board approved a plan to raise as much as $2.7 billion in a private share placement.

Exports rose 2.1 percent in June, while imports dropped 6.7 percent for a trade surplus of 284.2 billion yuan ($45.8 billion), the customs administration said. That compares with median estimates for a 1.2 percent gain in exports and a 16.2 percent decline in imports.

“Investors are regaining confidence in the long-term uptrend,” said Kong Weipeng, a Hong Kong-based executive committee member at Haitong International Securities Co.

For more, read this QuickTake: China's Managed Markets