China: Stocks rise as coal and steel shares gain on capacity cuts

[SHANGHAI] China's stocks rose, extending a weekly gain, as coal and steel producers advanced after the government pledged to further cut overcapacity and excess labor in those industries.

The Shanghai Composite Index climbed 0.8 per cent to 2,938.52 at the close. Angang Steel Co and Shanxi Lu'an Environmental Energy Development Co jumped more than 6 per cent as policy makers unveiled details of supply-side reforms, including targeting further reductions in crude steel production capacity by as much as 150 million tons and "large scale" cutbacks in coal output. The offshore yuan rose and benchmark money-market rates fell. Hong Kong's Hang Seng China Enterprises Index advanced 1.5 per cent at 3:03 pm.

"These measures will probably help these industries saddled with overcapacity to regain a balance in terms of supply and demand," said Wei Wei, an analyst at Huaxi Securities Co in Shanghai. "Without supply-side reforms, prices and profitability in these sectors will probably worsen. But now I see better prospects for them."

China has vowed in the past to curb overcapacity in industries such as coal and steel, which has dragged down the world's second-largest economy. The Shanghai Composite has fallen 17 per cent this year, making it the worst-performing major global benchmarks tracked by Bloomberg, amid concern about the government's ability to manage the economy and yuan volatility, along with a steep decline in leverage.

The offshore yuan rose 0.03 per cent to 6.6113 per dollar in Hong Kong. In a commentary, the official Xinhua News Agency warned some "radical" speculators who tried to short sell the yuan are expected to suffer huge losses as the Chinese central bank takes measures to stabilize the value of the currency.

Margin traders reduced holdings of shares purchased with borrowed money for a record 16th day on Friday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling 0.6 per cent to 574.7 billion yuan (US$87.4 billion).

The benchmark seven-day repo rate fell 5.1 basis points to 2.29 per cent on Monday, a weighted average from the National Interbank Funding Center shows. The People's Bank of China is adding administrative orders to its toolbox to calm money markets amid record capital outflows and a surge in cash demand before Year of the Monkey celebrations from next month.

Trading volumes in Shanghai were 26 per cent below the 30- day average. The benchmark index is valued at 11.6 times 12- month projected earnings, compared with the five-year average of 10.3, according to data compiled by Bloomberg.

The CSI 300 Index rose 0.5 per cent, led by energy, material and drug stocks. Hong Kong's Hang Seng Index gained 1.6 per cent.

Datong Coal Industry Co advanced 4.6 per cent, while Yanzhou Coal Mining Co gained 5.9 per cent. Baoshan Iron & Steel Co added 2.6 per cent.

China has lowered steel production by about 90 million tons "in recent years" and will push to cut a further 100 million to 150 million tons, while "strictly controlling" steel capacity increases and halting new coal mine approvals, according to a Sunday statement on the Chinese government's website, citing a State Council meeting on Jan 22 chaired by Premier Li Keqiang. No time line was mentioned.

The slump in Chinese stocks has about 14 per cent to go, and an eventual rebound won't be vigorous, according to UBS Group AG's George Magnus.

The Shanghai Composite may stop its slide around 2,500, the London-based senior independent economic adviser to UBS said by phone.

"We may not have touched the bottom yet but it's a lot closer," said Magnus. As for a sustained rally, he says, "you have to be optimistic about a Chinese soft landing and economic transformation, which I'm not personally optimistic about."

BLOOMBERG