China Stocks Cap Best Week Since June on SOE Reform Speculation

China’s stocks rose to an eight-week high as traders speculated the government will accelerate reforms of state-owned companies and data showed the nation’s broadest measure of new credit exceeded estimates.

The Shanghai Composite Index climbed 1.6 percent to 3,391.35 at the close. The benchmark gauge surged 6.5 percent this week for the steepest gain in four months. AVIC Aero-Engine Controls Co. and Beijing Capital Co. both jumped 10 percent to lead rallies for aerospace and utility shares on prospects for industry restructuring. The market’s two-week rebound continued to lure back investors, with Friday’s trading volumes jumping to their highest level since Sept. 2 and margin debt advancing for a sixth day on Thursday for the longest stretch of gains in two months.

The Shanghai Composite has risen 16 percent from an August low amid speculation that policy makers will introduce more measures to boost growth after a rout in equities that erased almost $5 trillion of market value. Data released this week showed consumer prices rose at a slower pace in September, leaving more room to ease monetary policy. SOE reform has become a catalyst for the market after the government this week announced plans to reorganize the telecom industry and promote price reforms in the utilities sector.

“The central bank has loosened its tap on liquidity and the SOE reform will continue through the year,” said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “It’s a good time window for stocks now and the rebound will probably carry on.” 

Economic Data

The CSI 300 Index increased 1.4 percent. Hong Kong’s Hang Seng China Enterprises Index and the Hang Seng Index both added 0.8 percent. The H-shares gauge surged 2.2 percent this week.

Avic Heavy Machinery Co. surged 10 percent. AVIC Aviation Engine Corp. gained 4.2 percent. China is considering setting up a new company that will bring all its aerospace engine assets under one entity as part of a government restructuring drive of state-owned enterprises, according to people familiar with the matter.

The plan, which straddles multiple ministries, is still in its initial stages and will pool all related assets from existing state-owned firms, according to the people, who asked not to be identified because the deliberations are private. Aviation Industry Corp. of China may end control over AVIC Heavy Machinery and AVIC Aviation Engine Corp. following a restructuring, the two listed companies said in separate statements this week.

Utilities Surge

Chengdu Xingrong Environment Co. also jumped by the daily limit. China will promote price reform in water, oil, natural gas, electric power and transportation sectors, the Xinhua News Agency reported, citing guidelines on promoting price reforms released by the State Council.

“SOE reform is the catalyst that will ultimately drive this market and indications are that this is certainly ramping up,” Douglas Morton, head of Asian research at Aviate Global LLP, wrote in a note. The measures will include commodity price reform, consolidation of excess capacity sectors, asset sales and asset injections, as well as mixed ownership, he said.

The Communist Party of China Central Committee will hold a key meeting during Oct. 26-29 to deliberate on an economic and social development plan for China over the next five years, according to Xinhua.

Official data due on Oct. 19 will probably show China’s economy grew 6.8 percent in the third quarter, the slowest pace since March 2009, according to the median estimate of 25 economists in a Bloomberg survey. The government’s growth target for this year is 7 percent.

Credit Growth

China’s leaders are poised to lower their growth target for the next five years as they wrestle with challenges from rising debt to excess industrial capacity and bloated state enterprises. More than two-thirds of 16 economists surveyed by Bloomberg News expect the growth target to be set at an annual average pace of 6.5 percent or less for 2016 to 2020, down from 7 percent the previous five years.

The People’s Bank of China said after Thursday’s market close that aggregate financing rose to 1.3 trillion yuan ($204.8 billion) in September, from an originally reported 1.08 trillion yuan a month earlier. That exceeded the median estimate of 1.2 trillion yuan in a survey of economists. New yuan loans rose to 1.05 trillion yuan. M2 money supply increased 13.1 percent.

Margin traders increased holdings of shares purchased with borrowed money on Thursday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising 0.9 percent to 600.9 billion yuan.

— With assistance by Shidong Zhang

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