Oct. 14 (Bloomberg) -- The Hang Seng China Enterprises Index became the first of Asia’s major equity benchmark gauges to exit a bear market as the Chinese government bought bank shares and pledged support for small business, spurring the biggest rally in three years.
Zijin Mining Group Co., Anhui Conch Cement Co. and Agricultural Bank of China Ltd. have rallied more than 39 percent since Oct. 4, sending the gauge of Chinese companies in Hong Kong to a 21 percent advance. The surge trimmed the 2011 loss for the H-share index to 23 percent.
“People are now realizing stocks were oversold,” said Yoji Takeda, who manages about $1.1 billion at RBC Investment Management (Asia) Ltd. in Hong Kong. “China’s H shares fell more than other markets recently with fears, especially among Western investors, about China’s hard landing and off-balance sheet lending.”
Global stocks have rebounded on speculation that European leaders will agree a plan to contain the region’s debt crisis when they meet on Nov. 3, and that the U.S. economy will avoid recession. The MSCI World All-Country Index has risen more than 6 percent this month, with Hong Kong-listed Chinese companies accounting for nine of its 10 biggest advances.
The so-called H-share stock index last month posted its worst quarterly loss in more than 10 years. It closed at its lowest since April 2009 on Oct. 4. The gauge plunged 29 percent as concerns about bank balance sheets and a wave of small business closures in the city of Wenzhou spurred speculation that the country was headed for a financial crisis.
It was the biggest drop since the three months to June 1998, when the Asian financial crisis helped send the index 39 percent lower.
The measure fell as much as 43 percent from a November peak as China raised interest rates and reserve-requirement ratios for banks to cool inflation that’s at the highest level in almost three years. China’s economy grew 9.3 percent in the third quarter from a year earlier, according to the median estimate of 22 economists surveyed by Bloomberg News.
Companies in the index trade at 8.1 times estimated earnings, according to data compiled by Bloomberg. That compares with a multiple of about 12 for the Standard & Poor’s 500 Index and MSCI Asia Pacific gauge. Valuations on the Chinese stocks fell as low as 6.7 times projected profit on Oct. 5, the lowest level since October 2008.
“The market has gotten very cheap,” said Francis Cheung, the head of China and Hong Kong strategy for CLSA Asia-Pacific Markets in Hong Kong. “Since the economy is doing okay, the question is, ‘When does the market turn?’ The hard part is that as long as the government is tightening, the market can’t rally too much.”
Huijin Buys Banks
Agricultural Bank of China, the nation’s No. 3 lender by market value, soared 39 percent since Oct. 4, and Industrial & Commercial Bank of China Ltd., the world’s biggest, increased 27 percent.
China’s state-run Central Huijin Investment started buying shares in the nation’s four biggest banks on Oct. 10 and plans to continue with “related market operations,” according to a statement on its website.
Shares of Chinese companies also surged after the nation announced measures to support small businesses after the collapse of manufacturers in Wenzhou highlighted growing risks to the economy. The government will provide financial support and preferential tax policies for small companies, the State Council said in a statement on Oct. 12.
Anhui Conch Cement surged 45 percent, and China Railway Group Ltd., a builder of the nation’s railroads, jumped 48 percent.
Metals Companies Rebound
Stocks have rallied after repeated assurances from European leaders that they will come up with a plan to stem the spread of a sovereign-debt crisis that has spread from Greece to Ireland and threatens Italy and Spain. German Chancellor Angela Merkel said governments will do “everything necessary” to ensure banks have enough capital. An Oct. 23 summit of euro leaders looms as a deadline for a breakthrough in combating a debt crisis. Leaders have set Nov. 3 as the deadline for a plan.
Jiangxi Copper Co., China’s No. 1 producer of the metal, soared 49 percent and Minmetals Resources Ltd., a copper and alumina producer, jumped 46 percent from their lows on Oct. 4 as the London Metal Exchange Index of prices for six industrial metals gained 7.6 percent from Oct. 4 through Oct. 12. Zijin Mining, the mainland’s largest gold producer by market value, surged 62 percent.
“China is a leveraged play on the rest of the world, so we’ve been recovering really rapidly on the back of good news out of Europe,” said CLSA’s Cheung. “I would take some risk off the table ahead of Nov. 3 because if the European plan disappoints, we could be in another correction.”
--Editor: Nick Gentle
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