China's Stocks Gain as Inflation Slows; Banks, Refiners Climb

By Chua Kong Ho

July 17 (Bloomberg) -- China's stocks rose for the first time in three days, led by banks and refiners, as inflation slowed last month and crude-oil prices declined.

Industrial & Commercial Bank of China Ltd., the nation's biggest bank by assets, led financial companies higher on speculation tightening measures will be eased. China Petroleum & Chemical Corp. and PetroChina Co., the nation's biggest oil refiners, gained after the biggest two-day drop in crude prices since January 2007. Coal producers declined after Shanxi Coking Co.'s parent said prices may fall from mid-2009 due to rising supplies.


``The slowdown in consumer price gains, coupled with falling oil prices, is positive as it gives the government more room to maneuver,'' said Michelle Qi, a portfolio manager at Bank of Communications Schroder Fund Management in Shanghai, which oversees $790 million.

The CSI 300 Index, which tracks yuan-denominated stocks traded in Shanghai and Shenzhen, added 0.1 percent to 2,749.43 as of 1:19 p.m. local time, after gaining as much as 2.5 percent and dropping 0.4 percent. Five of its 10 industry groups rose, with about five stocks gaining for every four that declined.

Gross domestic product grew 10.1 percent in the second quarter from a year earlier, the statistics bureau said today in Beijing. Growth was 10.6 percent in the first quarter. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May.

Industrial & Commercial Bank gained 0.6 percent to 4.79 yuan. Bank of Communications Co., whose shareholders include HSBC Holdings Plc, rose 2 percent to 7.70 yuan.

China Inflation

Inflation has eased from February's 12-year high of 8.7 percent on smaller gains in food prices. China has imposed lending quotas and ordered banks to set aside a record 17.5 percent of deposits as reserves to tackle inflation, after increasing interest rates six times last year.

China's banking regulator told policy makers that forcing banks to increase reserves has hurt the industry's ability to repay debt, according to a person with knowledge of the matter.

``Overall policy would likely be more supportive of growth later in the year,'' said Frank Gong, head of China research and strategy at JPMorgan Chase & Co., in an e-mail. ``The central bank may start to ease its tight grip on commercial banks' credit expansion.''

China Petroleum, or Sinopec, gained 0.5 percent to 10.45 yuan, while PetroChina added 0.8 percent to 14.96 yuan. China controls domestic fuel prices to limit their impact on inflation, hampering refiners' ability to pass on higher raw-material expenses.

Crude oil for August delivery fell 3 percent yesterday in New York after the U.S. Energy Department showed an unexpected gain in supplies, completing a two-day, 7.3 percent slump.

China Shenhua Energy Co., the nation's largest coal producer, slid 0.6 percent to 32.63 yuan. Pingdingshan Tianan Coal Mining Co., based in Henan province, dropped 1.6 percent to 31.94 yuan.

``For the medium and long term, demand may decline gradually and prices will fluctuate and show a declining trend,'' said Liu Jianzhong, deputy general manager of Shanxi Coking Coal Group Co., at a conference today.

The Shanghai Composite Index, which tracks stocks on the larger of the nation's two exchanges, gained 0.4 percent to 2,717.49. The Shenzhen Composite Index advanced 0.3 percent.

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at Kchua6@bloomberg.net