China: Shanghai Composite climbs back above 4,000 after inflation data

[HONG KONG] The Shanghai Composite Index climbed back above the 4,000 level and headed for a fifth week of advances after data showed deflationary pressures easing.

Energy and material companies led gains, with China Shenhua Energy Co. and Aluminum Corp. of China Ltd adding at least 1.5 per cent. Liquor maker Wuliangye Yibin Co paced a rally for consumer-staples producers with a 2 per cent increase. Data showed prices for consumer products climbed at the same pace last month as in February, while declines in costs at the factory gate stabilized.

The Shanghai Composite increased 1.6 per cent to 4,021.03 at 1.12pm, extending gains for the week to 4.1 per cent. The gauge had briefly surpassed that milestone on April 8 after a world-beating rally spurred by new investors flocking to equities at a record pace and traders taking out unprecedented debt to amplify their buying power.

"There is an increasing gap between economic fundamentals, which now seem rather stable, and stock market sentiment by local investors," said Gerry Alfonso, a director at the international business department of Shenwan Hongyuan in Shanghai. "Large caps, excluding financial stocks, have experienced a more stable environment recently and their valuations are now more attractive."

China's consumer-prices index rose 1.4 per cent from a year earlier, compared with the median estimate of 1.3 per cent in a Bloomberg News survey of analysts, a release from the statistics authority showed. The producer-prices index fell 4.6 per cent, compared with the previous month's 4.8 per cent, which was also the estimate.

Deflation Overblown Fears of an imminent slide into deflation appear excessive, said Bloomberg economists Tom Orlik and Fielding Chen. Central bank chief Zhou Xiaochuan has said that officials need to be vigilant in monitoring disinflation and that they have "room to act" with interest rates and quantitative measures.

The Hang Seng China Enterprises Index in Hong Kong rose 0.4 per cent, extending this week's jump to 9 per cent, the most since December 2011. The Hang Seng Index added 0.2 per cent, taking this week's rally to 6.8 per cent. The CSI 300 Index advanced 1.4 per cent. Shanghai trading volumes were 0.8 per cent above the 30-day average for this time of day.

Gauges of energy and material stocks in the CSI 300 climbed at least 1.5 per cent. Wintime Energy Co jumped 10 per cent. The Ministry of Finance is studying a cut in the coal value-added tax to 13 per cent from 17 per cent amid falling prices, the China Securities Journal reported, citing unidentified industry participants. An industry body will try to stabilise prices by curbing output, the newspaper reported.

Hong Kong Link Technology companies rebounded from two days of losses as Wangsu Science & Technology Co gained 7.3 per cent.

Hong Kong shares rallied this week as China's move in March to expand link access to more mainland funds, along with growing speculation that valuation gaps between the two markets will close, is driving the surge in purchases. Valuation discounts in the city reached the most extreme levels since 2011.

The H-shares gauge trades at 9.4 times estimated profit for the next 12 months, compared with 12.6 for the Hang Seng index and 15.4 for the Shanghai Composite. The Hang Seng China AH Premium index rose 0.4 per cent after falling around 8 per cent in the past two days.

Hong Kong's stock exchange said its systems have plenty of capacity to handle greater inflows from mainland China, including an impending trading connection with the Shenzhen bourse, even after a week of intense volume.

"People are finally realizing that there are opportunities in Hong Kong," Shane Oliver, head of investment strategy at AMP Capital Investors Ltd, told Bloomberg Television. "I think it has a lot of further to go. We like the China A-share market and we don't think it's overly frothy at the moment."

Bearish wagers on the Shanghai exchange have climbed more than threefold in the past nine months and reached a record 7.46 billion yuan on Thursday, a period in which the benchmark equity index jumped 94 per cent. Across the border in Hong Kong, where the Hang Seng has surged 7.6 per cent in just the past two days, the gauge's 20 most-shorted stocks rose 18 per cent on average.

BLOOMBERG