Rally in Chinese shares

Finally. Asian shares to benefit from wall of liquidity..
China Stocks Rise for 7th Day, Capping Best Rally in 11 Months; Banks Gain

By Bloomberg News – Oct 15, 2010 9:53 AM GMT+0200

China’s stocks rose for a seventh day, capping the longest rally in 11 months, as economic growth spurs higher fund flows into the country and improving earnings prospects bolster the nation’s lenders.

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. led gains for lenders after Citigroup Inc. said Chinese banks will report “solid” earnings growth in the third quarter. Air China Ltd. rose to a two-year high after the yuan gained to a record, reducing the cost of financing the airline’s dollar debt. Citic Securities Ltd. jumped 9.6 percent, capping a 32 percent rally for the week, on speculation surging trading volumes will boost revenue.

“Big-cap stocks with low valuations will be the next beneficiary of the catch-up amid the very ample liquidity environment,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 91.52, or 3.2 percent, to 2,971.16 at the 3 p.m. close, the most since May 24 and the longest winning streak since the eight days to Nov. 10, 2009. The measure has risen 8.5 percent this week, the most since Feb. 6, 2009, after the markets were shut last week for a holiday as global stocks rallied. The CSI 300 Index added 3.2 percent to 3,327.68 today, led by financial companies.

The Shanghai gauge has rebounded 26 percent from the 2010 low on July 5, surpassing the threshold some investors consider the beginning of a bull market, on signs that growth will remain resilient. The measure is still down 9.3 percent this year as government efforts to cool the economy and avert asset bubbles helped drag the gauge down 27 percent in the first half.

Foreign Investment

Foreign direct investment in China increased in September, underscoring confidence in the outlook for the fastest-growing major economy. Direct investment gained 6.1 percent in September from a year earlier to $8.38 billion, the Ministry Commerce said. Foreign investment for the first nine months rose 16.6 percent to $74.34 billion, it said. The Conference Board’s leading economic index for China rose 0.7 percent to 149.9 in August, the New York-based research organization said.

China’s banks will report “solid” earnings growth in the third quarter when they report the week of Oct. 25, according to Citigroup Inc. The nation’s lenders may report 32 percent profit growth on average for the third quarter, said Citigroup, which has an “overweight” on China’s banks versus regional lenders.

ICBC, the nation’s biggest listed lender, added 6.6 percent to 4.67 yuan. Construction Bank, the second biggest, rose 5.7 percent to 5.20 yuan. Agricultural Bank of China Ltd., the third largest, gained 5.7 percent to 2.95 yuan.

UBS AG said it expects a “lot more” foreign capital inflows heading to China because of quantitative easing as investors seek higher returns and gains from yuan appreciation.

Fund Flows

Emerging-market equity funds attracted more cash for a sixth straight week as overseas investors sought faster growth amid expectations the U.S. Federal Reserve will add stimulus, according to EPFR Global.

“Expectations that the U.S. Federal Reserve will initiate a second round of quantitative easing — the so-called QE2 – continued to occupy investors,” EPFR said. “Emerging market equity funds again enjoyed solid inflows during the second week of October as investors gravitated to the faster growth rates and appreciating currencies offered by this asset class.”

Royal Bank of Scotland Group Plc turned bullish on stocks in China and the rest of Asia this week, saying they will benefit from a global “liquidity wave” as central banks around the world reverse their tightening policies. China’s “relative valuations, liquidity conditions and ownership levels are now more attractive after a long period of substantial underperformance,” said Emil Wolter and Dylan Cheang.

Airlines Rally

Air China, the nation’s largest international carrier, rallied 9.7 percent to 15.20 yuan, its highest since May 2008. China Southern Airlines Co., the country’s biggest carrier by fleet size, surge the 10 percent daily limit to 10.75 yuan.

The yuan rose to the strongest level since 1993 on speculation American lawmakers will step up calls for faster appreciation after the U.S. yesterday said its trade deficit with China widened to a record $28 billion in August.

The Chinese currency added 0.1 percent to 6.6427 as of 3:21 p.m., contributing to a 0.4 percent advance for the week, according to the China Foreign Exchange Trade System. It touched 6.6424, the strongest level since the central bank unified official and market exchange rates at the end of 1993.

Citic Securities, China’s biggest listed brokerage, surged 9.6 percent to 14.96 yuan. Haitong Securities Co. advanced 7.4 percent to 11.47 yuan. China Merchants Securities Co. climbed 5.1 percent to 24.31 yuan.

Shares worth 265.1 billion yuan ($39.9 billion) changed hands on the Shanghai exchange yesterday, the most since Nov. 24, 2009, according to data compiled by Bloomberg.

Zhang Shidong. With assistance from Chua Kong Ho. Editors: Allen Wan, Richard Frost