China stocks up solidly after week-long holiday break on hopes of fresh stimulus

People walking under an electronic board showing stock information at the Shanghai Stock Exchange in China.
People walking under an electronic board showing stock information at the Shanghai Stock Exchange in China.PHOTO: REUTERS

HONG KONG (Bloomberg News) - China's stocks rose as trading resumed after a week-long holiday and investors speculated the government will take more steps to boost the world's second-biggest economy.

The Shanghai Composite Index climbed 3.8 per cent at 1:03 p.m., heading for the steepest advance in three weeks. More than 900 stocks climbed, with technology and health-care companies leading gains. Trading volumes were about 14 percent below the 30-day average for this time of day. Hong Kong's Hang Seng China Enterprises Index dropped 1.3 percent, after gaining 11 per cent during the mainland break.

Policy makers are increasing targeted stimulus as five interest-rate reductions since November failed to reverse an economic slowdown. The government lowered a property down- payment requirement for the first time in five years on Sept. 30 after cutting a tax on passenger-vehicle purchases. The MSCI All-Country World Index posted its biggest six day gain since 2011 while China's markets were closed as traders pushed back estimates for when the U.S. will raise borrowing costs.

"Mainland shares are catching up with a rally in global shares," said Ronald Wan, chief executive at Partners Capital International in Hong Kong. "Investors seem to be expecting more policy stimulus to come through this quarter. There's some turnaround in sentiment but investors' confidence will fade easily if the economy doesn't recover as expected." Bearish Wagers The CSI 300 Index advanced 4.1 percent, with all 10 industry groups gaining at least 3.4 per cent. Hong Kong's Hang Seng Index slid 0.7 per cent as China Mobile Ltd. slumped.

Traders have cut bearish wagers on the Deutsche X-trackers Harvest CSI 300 China A-Shares exchange-traded fund to a seven- month low amid expectations the latest policy efforts to stimulate the Chinese economy and the postponement of higher U.S. rates will help stabilize the mainland stock market. The odds of a Federal Reserve rate increase this month fell below 10 percent after reports in the U.S. last week showed the pace of hiring slowed in September and wage growth stalled.

Stocks in Hong Kong "are vulnerable to profit taking after their recent gains, but investor sentiment is improving," said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. "On top of the expectations a U.S. interest rate hike will be delayed, excessive concerns about China's economy are receding and there are hopes for more stimulus measures to come out." Targeted Stimulus East Money Information Co. and Guangzhou Baiyunshan Pharmaceutical Holdings Co. both surged 10 percent to lead rallies for technology and drug companies.

A gauge of developers in Shanghai advanced 3.8 percent after the government cut the minimum down payment requirement for first-time homebuyers to 25 percent from 30 percent. Poly Real Estate Group Co. jumped 4 percent. Great Wall Motor Co. rallied 10 percent, while SAIC Motor Corp. surged 6.8 percent after China reduced the purchase tax on vehicles with engines 1.6 liters or smaller by half to 5 percent through the end of next year.

Thursday's gain by the Shanghai Composite comes after the gauge tumbled 29 percent in the third quarter, the biggest slump among benchmark global indexes, as an equity boom turned to bust and leveraged traders cut positions. The Hang Seng China Enterprises gauge plunged 28 per cent in the second-worst performance. The MSCI All-Country World Index slid 9.9 per cent.

Bocom International Holdings Co.'s strategist Hao Hong recommends using any rally in China's stocks to sell as targeted stimulus isn't enough to revive the bull market. He says the Shanghai gauge needs to fall a further 18 per cent to 2,500 before it's cheap enough to buy, while the average estimate from eight other strategists compiled by Bloomberg implies a 12 per cent rally by year-end. Goldman Sachs Group Inc.'s analyst Kinger Lau lowered its 12-month target for the CSI300 index to 4,000 from July's 5,000, citing concerns over more moderate liquidity and still-recovering investor sentiment.

Even after the rout, the Shanghai Composite is valued at 15.8 times reported earnings, compared with its three-year average of 13. While volatility in the measure dropped to the lowest level in three months before the holiday, the decline coincided with an 88 percent drop in turnover from its June peak.