China's Stocks Rise for 2nd Day Amid Interest-Rate Cut Outlook - BusinessWeek

China’s stocks rose for a second day amid speculation the central bank will cut interest rates this month to spur economic growth.

Sinohydro Group Ltd., the nation’s biggest builder of dams, advanced for the first time in three days after it won a bid for a railway construction project in Shenzhen. Jiangxi Copper Co., the biggest copper producer, jumped 1.5 percent on the prospect lower borrowing costs will boost demand for metals. China Vanke Co. led declines for developers after the official Xinhua News Agency said property curbs will remain in place.

The Shanghai Composite Index (SHCOMP) climbed 0.2 percent to 2,316.72 at 9:36 a.m. local time. Stocks in the measure are valued at 9.98 times estimated earnings, compared with a record low of 8.9 times on Jan. 6, according to weekly data compiled by Bloomberg. The CSI 300 Index (SHSZ300) added 0.3 percent to 2,566.37.

“It’s highly likely the central bank will cut the reserve- requirement ratio or interest rates this month,” said Zhang Ling, general manager at Shanghai River Fund Management Co. “The market is already at the bottom now because of policy relaxation and valuations. But there won’t a big run-up because the economy isn’t likely to see a strong V-shaped recovery.”

About 6.6 billion shares changed hands in the Shanghai Composite yesterday, 27 percent lower than the daily average this year. Thirty-day volatility in the gauge was at 15.45, near a three-week high. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, added 1.3 percent at the close in New York.

The Shanghai gauge has climbed 5.1 percent this year on optimism the government will ease monetary policy and increase fiscal spending to bolster the economy.

Rate Outlook

The People’s Bank of China should cut interest rates at an appropriate time to boost confidence in the economy, according to a commentary on the front page of the China Securities Journal today, which is operated by Xinhua. Second-quarter economic growth may be less than 7.5 percent and falling producer prices show some areas face deflation risk, according to the commentary.

Data this weekend are expected to show fixed-asset investment expanded at the slowest pace in a decade, inflation matched a two-year low and industrial output grew less than 10 percent for a second month, Bloomberg economist surveys show.

“If the economic data for May still look bleak, we can’t exclude the possibility that the central bank will cut both lending and deposit rates,” said Shao Jiamin, the Shanghai- based head of fixed income at HFT Investment Management, which oversees some 30 billion yuan ($4.7 billion).

Lending Quotas

China International Capital Corp., the nation’s largest investment bank, and HFT Investment, the manager of the country’s top-performing bond fund, said it’s “necessary” to lower the benchmark lending rate of 6.56 percent as spending cools in the world’s second-largest economy.

China is expected to enter a period of consecutive reserve requirement cuts in the second half, the China Daily reported today, citing Ba Shusong, an economist with the State Council’s Development Research Center. The central bank will need to cut the ratio continuously in the next one to two years, it said.

New lending may have been 800 billion yuan ($107 billion) last month, the Economic Information Daily reported today, citing an unidentified person. Demand for medium- to long-term loans may improve as the government accelerates the pace of approving construction projects, it said. New loans were 681.8 billion yuan in April, the lowest this year, according to statistics from the central bank.

The MSCI Asia Pacific Index rose 0.2 percent today. The Institute for Supply Management’s index of non-manufacturing businesses, which covers about 90 percent of the economy, unexpectedly rose to 53.7 last month from April’s 53.5. The median forecast of 75 economists surveyed by Bloomberg News projected 53.4.

European Developments

Finance ministers and central bank governors from the world’s leading economies agreed to coordinate their response to Europe’s crisis on a conference call that dealt with Spain and Greece. Officials from the Group of Seven said they will work together to help Greece and Spain place their public finances on a sustainable footing, Japan’s Finance Minister, Jun Azumi, told reporters in Tokyo following the call.

Chinese stocks traded in New York advanced for the first time in five days, with China Eastern (CEA) (CEA) Airlines Corp. leading gains, on prospects measures to boost consumer spending in Asia’s biggest economy will spur growth.

Consumer Shift

The Bloomberg China-US Equity Index of the most-traded Chinese companies in the U.S. rose 1.3 percent to 87.87 in New York, snapping a four-day slump. China Eastern, the country’s second-biggest domestic carrier, rebounded from an eight-month low as Huaneng Power International Inc. (HNP) (HNP), China’s largest electricity producer, climbed to a three-month high. Suntech Power Holdings Co. (STP) (STP) led solar companies higher.

China’s Finance Ministry on June 4 announced a plan to subsidize energy-saving appliances as part of the government’s steps to promote domestic consumption and stimulate the economy at a time the European debt crisis crimps overseas demand. China’s services industry expanded at the fastest pace in 19 months, a survey of more than 400 private businesses released by HSBC Holdings Plc and Markit Economics yesterday showed.

China is now “shifting toward domestic consumption to encourage their own people to pick up the slack coming from the slower demand from Europe,” Michael A. Gayed, chief investment strategist in New York at Pension Partners LLC, which advises on over $150 million in assets, said by phone yesterday. “Utilities companies in China tend to pick up demand by stock buyers when they are feeling there’s going to be more activity from consumers or factories.”

China ETF

The iShares FTSE China 25 Index Fund (FXI), the biggest Chinese exchange-traded fund in the U.S., rose 0.1 percent to $32.62.

China’s retail sales in May, due to be released on June 9, probably rose 14.3 percent from a year earlier, after a 14.1 percent gain in April, according to the median estimate in a Bloomberg survey of 22 economists. Its economy, the world’s second-largest, expanded 8.1 percent in the first three months this year, the slowest pace in 11 quarters.

The consumer subsidy measure “is probably the first of many steps authorities will take until they get the level of GDP growth that they’re looking for,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in a phone interview.

China Southern

American depositary receipts of China Eastern, the second- largest carrier by passengers, gained 5.6 percent to $14.81 yesterday in New York. The ADRs traded 1.3 percent above their Hong Kong shares, the first premium in three days.

China Southern Airlines Co., Asia’s biggest carrier by passenger numbers based in Guangzhou, suspended trading in Hong Kong and the U.S. on pending news, it said in a June 4 filing to the Hong Kong Stock Exchange.

Ajay Kapur, head of Asian equity strategy at Deutsche Bank AG, recommended buying Chinese airlines on valuations and prospects for the government’s economic stimulus measures after they “had been hit really badly in the past three months” in an interview with Bloomberg Television yesterday.

China Eastern’s Hong Kong-traded shares are trading 4.6 times 12-month trailing profit, compared with a multiple of 5.49 for China Southern and 7.89 for United Continental Holdings Inc. in the U.S.

“As seasonal demand picks up in June and oil prices fall, airlines’ fundamentals will improve from previous quarters,” analysts at China Merchants Securities led by Luo Yanyan wrote in a report dated June 1, maintaining a neutral rating on the industry.

Huaneng Gains

Huaneng’s ADRs climbed 3.9 percent to a three-month high of $25.97. The ADRs are trading at a 0.6 percent discount to the Hong Kong stock, the smallest in five days.

China’s benchmark power-station coal price at Qinhuangdao port fell the most in five months, according to data from the China Coal Transport and Distribution Association on June 4.

“The move down in commodity prices is helping companies such as Huaneng, which uses a lot of coal,” Greg Lesko, who helps oversee over $800 million at Deltec Asset Management in New York, said by phone yesterday.

JA Solar Holdings Co., China’s largest solar-cell maker, surged 17 percent, the most among companies in the Bloomberg Global Leaders Solar Index (BLGS), after saying first-quarter shipments exceeded its forecast.

Shanghai-based JA Solar shipped 366 megawatts of solar cells and panels in the first quarter, ahead of its forecast of 320 megawatts to 350 megawatts, as demand in Italy and Germany exceeded its estimates, it said in a statement yesterday.

Suntech Power Holdings Co., the world’s largest solar-panel maker based in Wuxi in China’s eastern Jiangsu province, jumped 7.8 percent to $1.66, the biggest gain in a month. Trina Solar Ltd., the fourth-largest maker, soared 5 percent to $6.11. LDK Solar Co., the world’s second-largest maker of wafers, advanced 3.6 percent to $1.71 after a three-day decline. Yingli Green Energy Holding Co. added 2.7 percent to $2.65.

--Zhang Shidong. Editors: Allen Wan, Darren Boey

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net