China Stocks Surge in U.S. on Interest-Rate Cut; Bonds May Gain

By Darren Boey and Chua Kong Ho

Nov. 27 (Bloomberg) -- China stocks rose in U.S. trading and bonds may rally after the central bank slashed its key lending rate by the most in 11 years to support growth in the world's fourth-largest economy.

Depositary receipts for PetroChina Co., the nation's largest oil producer, climbed 11 percent. Cnooc Ltd., the biggest offshore oil producer, surged 13 percent. China Mobile Ltd., the No. 1 cell-phone operator, rose 10 percent.

The key one-year lending rate will drop 108 basis points to 5.58 percent from today, the People's Bank of China said on its Web site yesterday. The cut, announced after Chinese markets closed, comes less than three weeks after the country announced a 4 trillion yuan ($586 billion) stimulus package.

``It's an aggressive cut,'' said Michelle Qi, who helps oversee about $790 million at Bank of Communications Schroder Fund Management. ``Markets will probably go up. Investors will look at the economic figures because the rate cut isn't the only tool and they'll see what other policies are in the pipeline.''

The CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, rose 0.5 percent yesterday to 1,843.49. The gauge has declined 65 percent this year as the deepening global slowdown threatened the country's export industry. The economy grew 9 percent, the weakest pace in five years, in the third quarter. Export orders fell last month to the lowest level since 2005.

Reserve Ratio

The benchmark stock index has risen 9.9 percent since the government announced its stimulus plan on Nov. 9, which spans housing, rural development, railroads and power grids. The CSI 300 now trades at 12.6 times estimated profit, about a third of its valuation at the start of this year.

PetroChina climbed 11 percent to $83.55. Cnooc jumped 13 percent to $80.33. China Mobile added 10 percent to $46.89.

The central bank also lowered the amount that the country's biggest banks must hold in reserve to 16 percent from 17 percent, effective Dec. 5. The requirement for smaller banks will fall to 14 percent from 16 percent. Reducing the so-called reserve ratio frees up more cash for banks to lend.

``The past six weeks have seen a rapid deterioration in the economic picture,'' said Gabriel Gondard, deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7 billion. ``You can read it as good news that the government and central bank are extremely reactive or bad news that the slowdown is much worse than initially thought.''

Bonds May Rally

China's government bonds may rise, paring declines this week, as the rate cut was larger-than-expected. Some investors had said the reduction would happen last weekend.

``The bonds will jump tomorrow as the amount of the rate- cut exceeded market expectations by a large margin,'' said Fan Xiulan, a Beijing-based fixed-income analyst at BOC International Holdings, the investment banking arm of Bank of China Ltd. She said most analysts had expected a 54 basis-point reduction, compared with 108 basis points announced yesterday.

The yield on the 3.68 percent note due September 2018 rose 15 basis points this week to 3.15 percent, according to the China Interbank Bond Market. It has fallen from as high as 3.76 percent on Sept. 27. A basis point is 0.01 percentage point.

The yuan has been little changed since July as the government sought exchange rate stability during a global credit crisis. The currency closed at 6.8287 a dollar yesterday in Shanghai, falling 0.2 percent in the past four months, according to the China Foreign Exchange Trade System.

``The rate cut won't have a big influence on the yuan,'' said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co., a unit of China's biggest state investment company. ``China will keep the yuan stable for at least one year to spur the economy, in addition to the $4 trillion yuan fiscal stimulus package.''

To contact the reporters on this story: Darren Boey in Hong Kong at dboey@bloomberg.net; Chua Kong Ho in Shanghai at kchua6@bloomberg.net.