Bloomberg News

China’s Stocks Rise on Government Support for Small Companies

October 13, 2011

Oct. 13 (Bloomberg) -- China’s stocks rose for a third day, the longest stretch of gains in two months, after the government announced measures to help small companies hurt by the nation’s tight monetary policies.

Zhuzhou Times New Material Technology Co. and Hainan Expressway Co. surged at least 5 percent after the government offered tax breaks and easier access to loans for small and medium-sized enterprises. China Gezhouba Group Co. led gains for water companies as the Shanghai Securities News said China plans to invest 1.8 trillion yuan ($282 billion) in the industry.

“The government’s package of measures may support a rebound,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “The recent wave of government moves suggests the worst part of the tightening has passed.”

The Shanghai Composite Index advanced 18.8 points, or 0.8 percent, to 2,438.79 at 3 p.m. local time, extending a 3 percent rally yesterday, the most since Oct. 15, 2010. The CSI 300 Index gained 0.7 percent to 2,662.60. The CSI Smallcap 500 Index, comprising companies with an average market value of 6.3 billion yuan, rose 1.3 percent. The ChiNext Index, tracking start-up companies with an average value of 4.4 billion yuan, jumped 2 percent.

The Shanghai index has tumbled 13 percent this year, driving down estimated price earnings to 11.3 times, compared with the record low of 10.8 times set on Oct. 10, according to data compiled by Bloomberg. China has raised interest rates three times this year and ordered lenders to set aside a bigger portion of their deposits to curb inflation, running near a three-year high.

Government Measures

Stocks have rallied this week after Central Huijin Investment Ltd. began buying shares of the nation’s four-biggest lenders. Xinhua News Agency reported yesterday regulators approved cross-border exchange-traded funds. The 21st Century Business Herald reported yesterday the parent companies of trainmakers CSR Corp. and China CNR Corp. may get cash injections from the government.

China announced measures to help small companies after the collapse of manufacturers in Wenzhou city highlighted growing risks to the economy. A report today showed the nation’s trade surplus last month fell to the lowest since May as export growth slowed.

The government will provide financial support and preferential tax policies for small companies, the State Council said in a statement yesterday, after a meeting at which Premier Wen Jiabao presided. The government will be more tolerant of bad loan ratios for small-company loans, the Cabinet said.

Zhuzhou Times surged by 10 percent daily limit to 15.77 yuan. Hainan Expressway gained 5 percent to 4.03 yuan. Beijing Easpring Material Technology Co. increased 8.7 percent to 15.18 yuan. Shenzhen Zhongqingbaowang Network Technology Co. climbed 7.9 percent to 14.38 yuan.

Policy Support

China’s measures are “significant policy support” that will keep growing risks in Wenzhou city “under control,” according to Bank of America Corp.

The policies are “long-awaited measures in the right direction to help China’s small business cope with the current monetary tightening and rising uncertainties of external demand,” Lu Ting, an economist at Merrill Lynch, the brokerage unit of Bank of America, said in a report today.

Media “hype” surrounding reports of Wenzhou factory owners fleeing after failing to pay debts unnerved investors concerned about Chinese banks’ asset quality and a slowdown in the property market, UBS AG said in an Oct. 11 report. The city is known for a “vibrant private sector,” non-bank lending, and speculative investment in property, the brokerage said.

The government will extend income-tax breaks for small businesses until the end of 2015 and encourage bank lending by lowering requirements on bad loans and risk weightings, yesterday’s statement said.

‘Key Reversal’

China will maintain “relatively low” reserve ratios for small financial institutions, and the growth in lending to small companies should not be slower than banks’ overall credit expansion, according to the statement.

Poly Real Estate Group Co., the nation’s second-largest developer, gained 1.2 percent to 9.32 yuan. Gemdale Corp. rose 1.7 percent to 4.93 yuan.

The biggest rally for Chinese stocks yesterday in a year was a “key reversal,” with equities overcoming “bad news” such as U.S. legislation on the yuan and property curbs, according to China International Capital Corp.

“Simultaneous capitulation” in both onshore and offshore Chinese markets is a positive signal that wasn’t even seen in March 2008, Hao Hong, a Beijing-based global equity strategist at CICC, said in a report to clients. “Our adjusted view is that the sufficient and necessary conditions for a counter-trend rally are in place, namely, capitulation and cheap valuation,” he said.

Water Investment

China Gezhouba added 3.1 percent to 8.93 yuan, the highest close since Sept. 7. Anhui Water Resources Development Co. increased 3.9 percent to 13.51 yuan. Investments will cover four areas including conservancy construction and water supply projects, Shanghai Securities News said, citing the water resources ministry’s chief planner Zhou Xuewen.

Material stocks were the best performing industry group in the CSI 300, led by steelmakers. Maanshan Iron & Steel Co., China’s fourth-biggest steelmaker, and Angang Steel Co. jumped more than 2 percent after UBS boosted its recommendation for the Hong Kong-traded shares to “buy.” Maanshan advanced 4.8 percent to 3.05 yuan, while Angang climbed 2.6 percent to 5.50 yuan. Hubert Tang, analyst at UBS, cited valuations for the upgrades.

--Irene Shen. Editors: Allen Wan, Shiyin Chen

To contact the reporter on this story: Irene Shen in Shanghai at ishen4@bloomberg.net

To contact the editor responsible for this story: Shiyin Chen at schen37@bloomberg.net


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