China’s Stocks Climb on Interest-Rate Reduction; Bonds Advance

By Zhang Shidong

Nov. 27 (Bloomberg) -- China’s stocks rose after the central bank cut its key lending rate by the most in 11 years to spur growth in the world’s fastest-growing major economy. Government bonds gained the most in three weeks.

China Vanke Co., the nation’s biggest listed property developer, climbed 3.1 percent and Gemdale Corp., a Chinese developer that is a partner with ING Groep NV, advanced 5.4 percent on speculation lower borrowing costs will encourage home purchases. Anhui Conch Cement Co. surged on expectation demand for building materials will increase.

The CSI 300 Index, which tracks yuan-denominated A shares, gained 1.5 percent to 1,870.47 at the close. The yield on the 3.68 percent bond due September 2018 slumped 40 basis points, the most since Nov. 4, to 2.75 percent, according to the China Interbank Bond Market. The price of the security climbed 3.51 per 100 yuan face amount to 107.95.

“It’s a knee-jerk reaction to the rate cut and stocks sensitive to interest rates are being chased,” said Zhang Shuntai, who helps manage the equivalent of about $2.9 billion at Zhonghai Fund Management Co. in Shanghai. “We still need upcoming economic data to gauge whether the rate cut is effective in bolstering the economy.”

The reduction comes about three weeks after the country announced a 4 trillion yuan ($590 billion) package to stimulate an economy that grew at the weakest pace in five years in the third quarter. The CSI 300 has slumped 65 percent this year as the global slowdown threatens the country’s export industry. Export orders fell last month to the lowest level since 2005.

Cheaper Valuations

The benchmark stock index has risen 11 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 13 times estimated profit, about a third of its valuation at the start of this year.

The gauge may gain as much as 30 percent, as the rate cut boosts valuations of companies in the gauge to between 16 times and 17 times earnings, Citic Securities Co., the brokerage unit of China’s biggest investment company, said in a report today.

About six stocks rose for each that fell on the 300-member index, with all 10 industry groups climbing.

Vanke added 3.1 percent to 7.01 yuan. Gemdale gained 5.4 percent to 7.39 yuan. Beijing North Star Co., the property arm of Beijing’s city government, climbed 8.1 percent, to 3.34 yuan. Poly Real Estate Group Co., China’s second-largest developer by market value, advanced 1 percent to 17.56 yuan.

Construction Stocks

The key one-year lending rate will drop 108 basis points to 5.58 percent from today, the People’s Bank of China said after the market closed yesterday. The central bank also lowered the amount the country’s biggest banks are required to hold in reserve to 16 percent from 17 percent, effective Dec. 5.

“The rate cut underlines the urgency for the government of tackling the economic recession,” Shanghai-based Guotai Asset Management Co. said in a statement. “We expect the central bank to cut interest rates by a further 100 to 200 basis points by the end of 2009.”

Anhui Conch, the country’s biggest cement maker, jumped by the 10 percent daily cap to 26.61 yuan. Sany Heavy Industry Co., China’s biggest maker of machinery for handling concrete, rose 6.7 percent to 16.36 yuan. Dongfang Electric Corp., China’s second-biggest maker of power equipment, advanced 6.5 percent to 22.83 yuan.

Borrowing costs between banks slid to the lowest level this year. The seven-day repurchase rate, which reflects the availability of funds between banks, slumped more than 50 basis points to 2.01 percent, the lowest this year, according to the National Interbank Funding Center.

‘Aggressive Rate Cut’

The yuan was little changed, trading at 6.8296 per dollar from 6.8289 yesterday, according to the China Foreign Exchange Trade System. China has halted the yuan’s appreciation against the dollar since policy makers shifted focus from containing inflation to sustaining growth at the end of July.

“The aggressive rate cut may weaken investors’ confidence about the economy, but the central bank will continue to maintain the yuan’s stability,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the nation’s largest foreign- exchange trader. “The currency will trade around 6.8 per dollar for at least one year in the spot market.”

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net.