Chinese Stocks Advance as Materials, Small-Cap Companies Rally

  • Materials shares rise after NDRC signals further capacity cuts
  • Shenzhen equities rally amid Hong Kong connect speculation

Mainland Chinese stocks advanced the most among emerging markets in Asia as raw-material producers rose on expectations a campaign to reduce overcapacity will support prices and smaller companies rallied.

The Shanghai Composite Index added 1.5 percent at the close. China Shenhua Energy Co. and Angang Steel Co. rallied after the National Development and Reform Commission said the nation will further cut capacity in the coal and steel industries. Kweichow Moutai Co., the biggest maker of baijiu liquor, rose to a record after a brokerage forecast industry shares could climb 20 percent. The ChiNext index of smaller companies in Shenzhen jumped to a three-week high amid speculation an exchange link with Hong Kong will start soon.

The advances came amid optimism that mainland companies will be able to withstand the fallout from the U.K.’s vote to leave the European Union, which has roiled markets around the world and erased more than $2.5 trillion in equity values. The markets have overreacted to the so-called Brexit and need to calm down, China’s Finance Minister Lou Jiwei said in Beijing over the weekend.

“China-specific companies that are not too related to Brexit, such as the steel and coal sectors, should be beneficiaries,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “Product prices in the two sectors are already oversold, so any surprise cut in capacity can lead to an increase in prices.”

The Shanghai Composite rose to 2,895.70. The CSI 300 Index advanced 1.4 percent. The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong gained 0.5 percent at the close after dropping as much as 1.5 percent earlier. The MSCI Emerging Markets Index fell 0.4 percent as of 4:23 p.m. in Hong Kong, paring a loss of as much as 1.1 percent.

Hong Kong’s financial markets will be closed on Friday to mark the 19th anniversary of the former British colony’s handover to China.

Capacity Cuts

China Shenhua, the nation’s biggest coal producer, increased 3 percent to the highest close since May 6. China Coal Energy Co. surged 6.9 percent. Angang Steel Co. advanced 4.6 percent, the most in nearly four months.

China will cut coal capacity this year by about 7.5 percent to curb pollution and eliminate so-called “zombie” companies in the struggling industry, NDRC Chairman Xu Shaoshi said at the World Economic Forum in Tianjin on Sunday. The nation will also shed 45 million tons of steel capacity by the end of 2016, he said.

Kweichow Moutai advanced 5.1 percent, while Wuliangye Yibin Co. gained 3.3 percent. Jiangsu Yanghe Brewery Joint-Stock Co. added 3.2 percent. Shenwan Hongyuan Group Co. recommends the industry as high-end liquor makers expand output, analyst Lv Chang wrote in a report Monday.

Fiscal Space

The ChiNext index jumped 3 percent and the Shenzhen Composite Index gained 2.4 percent.

“Investors are anticipating the Shenzhen-Hong Kong connect will be announced over the long July 1 weekend," said Dickie Wong, an executive director at Kingston Securities Ltd.

China has ample fiscal space to cope with any market turbulence triggered by Brexit, according to Jin Liqun, president of Asian Infrastructure Investment Bank, the new China-backed development bank. Policy makers should ensure sufficient liquidity to help manage the fallout from Brexit while avoiding a build up of inflationary pressures, Jin said in an interview Sunday with Bloomberg Television.

— With assistance by Shidong Zhang

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