China's Inflationary Sweet Spot Propels Rocketing H Shares

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  • Price gains to boost profits, without triggering PBOC action
  • Record loans propel banks, show limits of money-market curbs

China's Credit Surges to Record High

The bullish indicators just keep piling up for Asia’s best-performing stocks.

Chinese shares listed in Hong Kong have roared back to a 15-month high, bolstered by signs the central bank’s money-market tightening is yet to impact bank lending, with a gauge of new credit at a record in January. H shares, which are racking up their best start to a year since 2012, are also seeing support from another corner -- inflation. Analysts say price growth is in the so-called Goldilocks zone, providing a tailwind for equities that have seen recent profits dogged by concern over China’s economy and the yuan’s retreat.

“The gradual pick up in price growth is positive for the stock market because it indicates improvement in the economic fundamentals and implies a potential increase in earnings,” said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. “At the same time, inflation is not rising fast enough to spark a broad-based interest-rate hike from the central bank, which should be supportive of market sentiment for now.”

While Chinese producer-price growth has staged an impressive turnaround, reversing more than three years of contraction to return to 2011 levels, stock traders can take comfort from the People’s Bank of China. Officials have zealously pursued leverage reduction by tightening money-market conditions, but have so far refrained from boosting benchmark interest rates given the economic recovery is still nascent. China may also be fueling the global reflation trade, with U.S. investor Michael Shaoul attributing the revival in risk appetite to price growth there, rather than Donald Trump’s spending pledge.

No Worries

The recovery in factory-gate prices bodes particularly well for industrial company earnings, with the boost likely to show up in first-quarter results, said Li Chen, a strategist at Credit Suisse Group AG in Hong Kong who tracks mainland-listed Chinese shares. Growth in earnings-per-share for companies in the Hang Seng China Enterprises Index has been falling since 2014, and the measure’s price-to-earnings ratio of 8.6 is almost half that of the MSCI Asia Pacific Index, according to data compiled by Bloomberg.

Chen sees consumer-price growth slipping back below 2 percent for this month given the big-spending Lunar New Year period occurred in January this year, from February last year.

“I don’t think investors need to worry about possible inflation-inducing policy tightening weighing on stock performance,” he said.

Lenders from Agricultural Bank of China Ltd. to Bank of Communications Co. led gains in the H-share index Wednesday, which rose 1.9 percent in Hong Kong, its steepest advance since November. An index tracking financial shares on the MSCI China Index jumped the most in 10 months.

“We’re in a good environment for a couple of months,” Claude Tiramani, who helps oversee about 180 billion euros ($190 billion), including H shares, at LA Banque Postale Asset Management in Paris. “The lack of corporate earnings has weighed on the market for a number of years, and now people have positive expectations.”