China's Stocks Rise to Seven-Week High Amid Stimulus Speculation

  • PBOC may cut interest rates or reserve ratios, Jinkuang says
  • Government proposes tighter oversight of program trading

China’s stocks rallied to the highest level in seven weeks and turnover jumped amid speculation the government will take more steps to bolster economic growth.

oct 12 shcomp

The Shanghai Composite Index climbed 3.3 percent to 3,287.66 at the close, with trading volumes jumping to a one-month high. The stocks gauge has advanced 7.7 percent since financial markets resumed trading on Thursday after a week-long holiday. Hundsun Technologies Inc. and Shenzhen Zhongjin Lingnan Nonfemet Co. surged 10 percent to lead gains for technology and material shares.

Speculation that China’s central bank will reduce interest rates or reserve-requirement ratios has increased before data this week that will likely show slowing exports and decelerating inflation. The People’s Bank of China announced over the weekend it will expand a relending trial to nine more cities and provinces, while Premier Li Keqiang said the government will increase fiscal support for shantytown redevelopment.

“Given the weakness in the economy, the expectations are quite strong about a cut in interest rates and reserve-requirement ratios,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai, who’s adding to his holdings. “The market is picking this up and the confidence is back.”  

Targeted Support

The Shanghai gauge has rebounded 12 percent from the August low as the government targeted support for important industries such as autos and property to bolster growth. This month, China has cut the purchase tax on vehicles with engines 1.6 liters or smaller by half to 5 percent, effective through the end of next year, and reduced the minimum down-payment requirements for first-time homebuyers.

The CSI 300 Index rose 3.2 percent. Hong Kong’s Hang Seng China Enterprises Index advanced 1.3 percent, rebounding 16 percent from a low in September, while the Hang Seng Index gained 1.2 percent. Trading volumes in Shanghai were 29 percent above the 30-day average on Monday and rose to the highest level since Sept. 2.

Sub-indexes of technology and material companies in the CSI 300 climbed more than 4 percent, the most among 10 groups. Yonyou Network Technology Co. jumped 7.4 percent while Yunnan Chihong Zinc & Germanium Co. surged by the 10 percent daily limit.

Easing Concern

Premier Li said the government will also increase tax support for shantytown development, the State Council said on its website on Saturday. Shanghai, Tianjin, Liaoning, Jiangsu, Hubei, Sichuan, Shaanxi, Beijing and Chongqing will be included in a trial that allows banks to borrow from the PBOC using credit assets as collateral, according to a statement on the central bank’s website.

“Investors are worried that the government is not doing enough to meet the 7 percent growth target,” said Bernard Aw, strategist at IG Asia Pte. in Singapore. “News of more stimulus, be it from PBOC or on the fiscal side, could go some way to allay those worries.”

China has cut the amount of cash lenders must set aside as reserves three times this year and lowered rates five times since November, as the economy heads for its weakest annual expansion in more than two decades. During the October break, the government released data showing the official purchasing managers’ index advanced to 49.8 in September. While the index showed manufacturing stabilizing, it remains below the 50 level that indicates an expansion.

Economic Data

The government will release export and consumer-price data on Tuesday and Wednesday, respectively. Overseas shipments probably dropped 6 percent last month from a year earlier, while the inflation rate slowed to 1.8 percent, according to the median estimates of Bloomberg surveys.

In August, Thomas Schroeder correctly predicted a rebound in Chinese stocks wouldn’t last. Now, he says, the gauge will plumb new lows as a bear-market rally fails.

The Shanghai Composite will climb 29 percent to 4,100 in the next three months, before slumping as much as 41 percent to 2,400 in early 2016, Schroeder, the Bangkok-based founder and managing director of Chart Partners Group Ltd., said in an interview in Singapore. Schroeder, a former Asian technical analysis chief at UBS Group AG, cited triangle and wedge patterns in making his call.

Algo Trading

Chinese regulators are planning to increase their oversight of algorithmic traders, extending a campaign to stabilize the equity market that some analysts say has resulted in an exodus by foreign investors.

Under draft rules released by China’s securities regulator on Friday, traders who use automated orders to buy and sell stocks would need to report certain information and wait for a review before they’re allowed to execute their strategies. Orders shouldn’t originate from offshore computers or domestic systems that are remotely controlled from overseas, according to the China Securities Regulatory Commission’s proposal.

“Program trading is aimed at making money through arbitrage opportunities and it had an impact on destabilizing the market during the rout,” said Jinkuang’s Zhang. “The policy is now to rectify that.”

(A previous version corrected the number of PBOC rate cuts.)

— With assistance by Shidong Zhang

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