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China: Stocks rise to highest in seven years; small-caps tumble

China is forging the country's answer to General Electric, combining two state-owned railroad equipment makers to create the world's second-largest industrial company. And the giant isn't planning to stay at home.

[BEIJING] Chinese shares rose to the highest level in seven years in volatile trade as bets MSCI Inc will include mainland shares in its indexes overshadowed weaker shipments data. The ChiNext index of smaller companies tumbled.

Bank of Communications Co led gains among financial shares. CRRC Corp, formed by merging rail companies CSR Corp. and China CNR Corp, jumped 10 per cent in Shanghai on its first day of trading. Shenzhen Infogem Technologies Co slumped by the 10 per cent daily limit, pacing declines on the ChiNext, which sank 4.9 per cent.

The Shanghai Composite Index rose 0.9 per cent to 5,068.47 at the break, heading for its highest close since January 2008 and extending last week's 8.9 per cent rally. Data Monday showed China's exports declined in May for a third straight month and imports slumped for the seventh. MSCI will announce on Tuesday in New York whether to add China's locally traded shares in its equity benchmarks.

"The market is looking ahead to whether MSCI will include A shares in its emerging-market indexes and that could create some wild swings in Chinese shares," said Bernard Aw, a Singapore-based market strategist at IG Asia Pte Ltd.

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The CSI 300 Index added 0.7 per cent. Hong Kong's Hang Seng China Enterprises Index climbed 1.5 per cent. The Hang Seng Index rose 0.3 per cent. The Shanghai Composite's 100-day volatility measure was near the highest level in more than five years.

The value of Chinese stocks is poised to reach US$10 trillion after a world-beating rally added virtually the equivalent of Japan's equities market this year. Companies with a primary listing in China were valued at US$9.7 trillion at the end of trading Friday, an increase of US$4.8 trillion since the end of 2014, according to data compiled by Bloomberg. Japan's stock market is valued at US$5 trillion, while the US is at almost US$25 trillion.

Bank of Communications rallied by the 10 per cent daily limit Monday and Bank of China Ltd added 8.1 per cent, sending a gauge of financial stocks up 2.8 percent, the most among 10 industry groups on the CSI 300 index. PetroChina Co, the biggest weighting on the benchmark gauge, rose 2 per cent, propelling energy shares higher.

"Some large caps are having a strong performance today as those names are likely to be the biggest beneficiaries of a potential inclusion of China in the MSCI index," said Gerry Alfonso, a director at Shenwan Hongyuan Group Co in Shanghai. "Investors seem to be building positions ahead of the announcement." China, through its companies listed in Hong Kong, accounts for more than 25 per cent of the emerging-market benchmark. It's the biggest weighting in the gauge, followed by South Korea's 15 per cent and 13 per cent for Taiwan, data compiled by Bloomberg show. MSCI has kept China's A shares out of its indexes due to limitations on their tradability.

The Shanghai measure has jumped 150 per cent in the past 12 months, the most among major global benchmark indexes, spurred by surging participation among individual Chinese investors and record margin debt. The rally in mainland stocks has widened their premium over Hong Kong-listed peers to 38 per cent, the most since 2011.

A gauge of technology companies on the CSI 300 index lost 2.9 per cent Monday, paring its advance this year to 122 per cent. The ChiNext fell for a third day from a record high.

"The IT sector is experiencing a correction, which looks as a technical one after the rally last week," Mr Alfonso said.

Trading in Shanghai was 52 per cent above a 30-day average for this time of the day. The gauge is valued at 25 times reported earnings, the most expensive relative to the MSCI All- Country World Index in seven years. The Shenzhen Composite Index trades at a multiple of 75. The MSCI gauge is valued at 14.4 times.

Margin traders increased holdings of shares purchased with borrowed money for a 10th day on June 5, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising to a record 1.41 trillion yuan (S$309.2 billion).