Bloomberg News

Yuan Band Move Boosts Stocks to Baochuan: China Overnight

April 15, 2012

A bundle of Chinese yuan banknotes is arranged for a photograph in Beijing, China. Photographer: Nelson Ching/Bloomberg

A bundle of Chinese yuan banknotes is arranged for a photograph in Beijing, China. Photographer: Nelson Ching/Bloomberg

Chinese stocks will probably climb this week as the widening of the yuan’s trading band is seen as a move toward further liberalization of the world’s second- largest economy, according to Baochuan Capital Management LLC.

The People’s Bank of China expanded the range the managed yuan is allowed to trade within against the dollar for the first time since 2007 on April 14, 11 days after it raised the amount of onshore-traded stocks and bonds that can be bought by foreign investors. The Bloomberg China-US Equity Index (CH55BN) of the most- traded Chinese stocks in the U.S. dropped 0.5 percent to 103.19 on April 13, little changed in the week, while the Shanghai Composite Index jumped 2.3 percent last week to 2,359.16.

“The market response will be that this is China opening up long-term,” Kevin Carter, co-founder and chief executive officer at Baochuan Capital, where he helps oversee about $282 million, said by phone from Walnut Creek, California on April 14. “While it’s more of a gesture than a real move with impact, it’s a small piece of a bigger long-term goal to open up China’s markets and currency. This could certainly be another positive thing for Chinese stocks.”

Chinese officials pledged to keep easing controls on the currency in a five-year plan through 2015, as the government aims to bolster domestic consumption and fend off criticism from nations including the U.S. that a weaker yuan gives China an unfair trading advantage.

The yuan’s trading band was widened to 1 percent from 0.5 percent and takes effect today. Regulators also raised the quotas for foreigners to buy stocks and bonds to $80 billion from $30 billion on April 3.

Airlines Lead Drop

The yuan was little changed at 6.30 per dollar last week in Shanghai. Air carriers led declines in U.S.-traded Chinese shares, on concern faltering economic growth is sapping company profits.

China Eastern Airlines Corp. (CEA:US) had its worst slump this year, while China Southern Airlines Co. (ZNH:US) sank for a second week in New York, after both carriers said that first-quarter profit probably fell more than 50 percent on the slowing economy and higher fuel prices.

The economy expanded 8.1 percent from a year earlier in the first quarter, Chinese government data released on April 13 showed, the slowest pace of growth in 11 quarters and below the 8.4 percent median forecast of 41 analysts surveyed by Bloomberg. Stocks on the China-US gauge trade for 17.6 times earnings estimates, down from a valuation of as much as 22.6 times in March.

Bank Reserve Ratios

China cut reserve-requirement ratios for county-level banks by 100 basis points, or one percentage point, the state-backed Xinhua News Agency reported on April 13, citing unidentified people familiar with the matter. The amount major banks must set aside as reserves has been reduced twice by the same total amount since November, while ratios for Agricultural Bank of China Ltd. (601288)’s branches were decreased last month.

“Slower growth will likely force the People’s Bank of China to initiate further stimulus,” Michael A. Gayed, chief investment strategist in New York at Pension Partners LLC, which advises on over $150 million in assets, including Chinese shares through exchange-traded funds, said by e-mail on April 13.

The yuan move, “does not mean stocks have to go up, but simply that they could go either up more or down less than U.S. markets as a result,” Gayed said in a separate e-mail on April 14. It will be viewed as a “net positive in the short term as markets cheer more market-oriented currency measures.”

China ETF Steady

The IShares FTSE China 25 Index Fund (FXI:US), the biggest Chinese exchange-traded fund in the U.S., was little changed at $37.42 on April 13, trimming its weekly advance to 1.1 percent. The Standard & Poor’s 500 Index (SPX) slid 1.2 percent to 1,370.26 and was down 2 percent last week.

First-quarter profit for Guangzhou-based China Southern, Asia’s biggest air carrier by passenger numbers, probably dropped more than 50 percent from the 1.24 billion yuan ($197 million) earned in the first three months of last year, the company said in a statement on April 13, citing Chinese accounting standards. The decline was caused by a “slowdown in the domestic economic growth and the substantial increase of jet fuel prices,” China Southern said.

American depositary receipts of China Southern sank 4.2 percent to $22.53 on April 13 in New York, extending their second weekly decline (ZNH:US) to 2 percent. Each ADR represents 50 common shares in the company. The ADRs traded 2.3 percent below (ZNH:US) the company’s Hong Kong stock, which was unchanged at HK$3.58, or 46 U.S. cents. The discount was the first in three trading sessions.

Jet Fuel Jump

Jet fuel prices have jumped 8.1 percent this year in Singapore trading, reaching a 10-month high on March 9. Crude oil traded on the New York Mercantile Exchange has added 4 percent this year.

China Eastern, the nation’s second-largest carrier by passenger numbers, also expects that net income decreased more than 50 percent in the first quarter, according to a statement to the Hong Kong stock exchange on April 13.

ADRs of the Shanghai-based airline slid 1.8 percent to $15.56 in New York, and were down 6.9 percent last week, the biggest weekly slump since the five days to Dec. 9. The ADRs traded at a 1 percent discount to China Eastern’s Hong Kong stock, reversing premiums over the previous two days.

Data last week also showed that China’s imports in March rose seven times less than in February. The government pared this year’s economic-growth target to 7.5 percent last month, the lowest level since 2004.

New Loans

Chinese lenders added 1.01 trillion yuan ($160.1 billion) of new loans in March, the most since January 2011 and more than all 28 analysts surveyed by Bloomberg estimated, the central bank said April 12.

In terms of Chinese economic growth, “anything below 8.5 percent is worrying,” Richard Lin, chief investment officer at Kuala Lumpur-based Great Eastern Life Assurance (Malaysia) Bhd., which manages 53 billion ringgit ($17 billion) of assets, said on April 13. “That’s why the March loan number shot up. It’s actually a form of monetary policy easing.”

U.S.-traded stock of LDK Solar Co. (LDK:US), the world’s second- largest manufacturer of solar wafers, dropped for a ninth straight week, losing 5.6 percent to $3.19, the lowest level since Nov. 25.

The company, based in Xinyu in China’s Jiangxi province, delayed the release date of its fourth-quarter results to April 30 from April 12, as “management needs additional time to finalize certain items,” according to an April 10 statement.

LDK Firings

LDK is making personnel changes involving several teams in its wafer department, the National Business Daily said in a report dated April 10 on its website, citing LDK’s public relations division. The adjustments will mainly include dismissing or assigning excess personnel to other departments, the Shanghai-based newspaper reported, citing e-mails on April 9 from LDK spokesman Li Longji.

Three analysts reiterated (LDK:US) their sell ratings on the stock last week and one kept a hold recommendation, data compiled by Bloomberg showed.

Should the People’s Bank, which since July has kept benchmark interest rates at the highest level since 2008, enact more monetary easing, it will be a boost for Chinese stocks, said Mark Williams, a London-based analyst at Capital Economics Ltd., who previously advised the U.K. Treasury on China.

“We expect four more cuts to banks’ reserve ratios this year and have penciled in two interest-rate cuts if the euro- zone crisis takes a sharp down for the worse,” Williams said by phone. “Given current valuations and given the strong signals that the government is easing policy, Chinese stock prices are likely to rise significantly.”

The Shanghai Composite (SHCOMP) advanced 0.4 percent to 2,359.16 on April 13, the highest level since March 22. The gauge has increased 7.3 percent this year and trades for 9.5 times member companies’ projected earnings, data compiled by Bloomberg show.

To contact the reporters on this story: Belinda Cao in New York at lcao4@bloomberg.net; Emma O’Brien in New York at eobrien6@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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Companies Mentioned

  • CEA
    (China Eastern Airlines Corp Ltd)
    • $24.35 USD
    • 0.73
    • 3.0%
  • ZNH
    (China Southern Airlines Co Ltd)
    • $24.24 USD
    • 0.77
    • 3.18%
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