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China's stocks rally most in 3 years on support speculation

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China’s stocks jumped the most in three years on speculation state-backed institutions were buying shares as a manufacturing survey added to optimism the world’s second-largest economy will rebound.

The climbed 4.2 per cent to 2,149.21 at 2:48 pm. were more than double the 30-day average for this time of day. A gauge tracking financial companies surged 6.4 per cent as brokerages jumped on signs the government will allow more overseas funds to buy equities. Co led a rally by industrial companies higher after a preliminary reading for a factory output index rose.

“It looks like institutional investors are re-entering the market and they have to increase their stock positions now in order not to miss the boat,” said Dai Ming, a fund manager at Hengsheng Hongding Asset Management Co in Shanghai, which manages $190 million. “The economy has stabilised.”

The surged 4.7 per cent to 2,348.16, with all 10 industry groups advancing more than two per cent. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong rose 1.6 per cent to a nine-month high.

The Shanghai Composite has advanced four per cent this week, extending last week’s 4.1 per cent rally that was the biggest in 13 months. Shares have rebounded from an almost four-year low reached on December 3. The gauge is still down 2.5 per cent this year, heading for a third straight annual loss.

The 994-member index trades at 11.8 times reported earnings after valuations fell to 10.8 this month, the lowest level since at least 1997, data compiled by Bloomberg show.

Ping An
“There’s speculation that Ping An Insurance is increasing its positions in Chinese equities,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co, which oversees $285 million. Ping An Insurance (Group) Co, the second-largest insurer in China, rallied eight per cent to 41.95 yuan.

Speculation that large insititutions are buying shares follows data this week showing the number of trading stock - trading accounts containing funds declined to the lowest in two years.

A gauge tracking financial companies jumped 6.4 per cent on the CSI 300. Citic Securities, China’s biggest listed brokerage, rallied seven per cent to 11.50 yuan. Haitong Securities Co, the second largest, gained 6.1 per cent to 9.33 yuan.

China may relax or abolish a rule that requires Renminbi Qualified Foreign Institutional Investors (RQFII) to keep most of their funds in bonds, according to the Hong Kong Monetary Authority, a move that may boost demand for stocks.

Banks rally
RQFII funds, which raise yuan overseas, now must invest at least 80 per cent of their assets in China’s onshore bond market, with the rest going into equities or kept as cash.

Stocks also gained ahead of this weekend’s Central Economic Working Conference, which sets the tone for policies for 2013. The Chinese government may announce it will keep its economic growth target at 7.5 per cent, according to Nomura Holdings Inc.

ICBC paced gains for banks, jumping 3.3 per cent to 4.08 yuan. Agricultural Bank of China Ltd advanced 4.1 per cent to 2.79 yuan, the most since October 2010.

The December preliminary reading for the HSBC Holdings Plc and Markit Economics’s purchasing managers index rose to 50.9, more than the 50.8 median estimate in a Bloomberg News survey of economists and the final reading of 50.5 for November. Last month was the first time in 13 months it was above the expansion-contraction dividing line of 50.

Sany Heavy, the biggest Chinese machinery maker, advanced 6.7 per cent to 9.25 yuan. Anhui Conch Cement Co rose 3.6 per cent to 18.56 yuan, its highest level since November 2011.

Leadership transition
Today’s report may bolster confidence in the economic recovery after November’s trade and new loans trailed estimates.

Recent stock market gains had failed to stem equity outflows. Accounts containing funds used to trade stocks dropped by about 49,000 in the week to December 7 to 55.55 million, the lowest level since the week to November 26, 2010, according to regulatory data compiled by Bloomberg on December 12. Investors emptied 205,000 accounts the previous week, the most in 16 months.

The Shanghai Composite’s 9.7 per cent rally from its December 3 low still lags the 26 per cent gain by the Hang Seng China index of mainland companies listed in Hong Kong from its September 5 low. Chinese companies on the mainland traded at their biggest discount to their Hong Kong-traded counterparts since January 2011 yesterday, according to an index from Hang Seng Bank Ltd.

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