China's Stocks Rebound From Biggest Drop in Year, Led by Drugmakers, Banks

China’s stocks rebounded on speculation the equity market’s plunge last week by the most in a year was excessive given the economy’s growth prospects.

Gauges of drugmakers and consumer companies jumped more than 2 percent after JPMorgan Chase & Co. recommended those industries. Agricultural Bank of China Ltd. paced gains for lenders after Caixin Online reported it and China Construction Bank denied a report that loans to property developers have been halted. Jiangxi Copper Co. and Aluminum Corp. of China Ltd. led a retreat for metal producers as China International Capital Corp. said further policy curbs may extend their declines.

China’s stock valuations are “very reasonable,” said Bin Hu, Chief Executive Officer of BNY Mellon Western Fund Management Co. in Shanghai. “As long as the Chinese economy grows at about 8 to 10 percent, corporate earnings should grow faster than that.”

The Shanghai Composite Index gained 1 percent to 3,014.41 at the close at 3 p.m. The index fell 5.2 percent on Nov. 12, the most since Aug. 31, 2009. The losses halted a six-week rally, as investors speculated policy makers may raise rates for the second time in two months to curb inflation. The CSI 300 Index climbed 0.7 percent to 3,314.89 today, while the CSI Smallcap 500 Index rose 2.8 percent after falling 6.1 percent on Nov. 12.

A gauge of health-care stocks gained 5.1 percent for the biggest advance in the CSI 300 Index today. A measure of consumer staples surged 3.9 percent and an index of consumer discretionary companies rose 2.3 percent. Adrian Mowat, JPMorgan Chase’s chief Asian and emerging-market strategist, recommended these industries, saying in a Bloomberg Television interview they will benefit from the government’s efforts to restructure its economy away from exports towards consumption.

Growth Prospects

Kangmei Pharmaceutical Co. led gains for drugmakers, jumping 8.7 percent to 22.09 yuan. Kweichow Moutai Co., a spirits maker, paced an advance for consumer companies, rising 3.5 percent to 183.69 yuan.

“The medium-term outlook is good,” said HSBC Private Bank’s Arjuna Mahendran, the head of investment strategy for Asia in Singapore at HSBC Private Bank, a unit of Europe’s largest lender overseeing $460 billion globally. “This is an opportunity to buy stocks at decent prices.”

The Shanghai Composite now trades at 19.4 times reported earnings, compared with 26.4 times at the beginning of the year, according to weekly data compiled by Bloomberg.

China’s economy surpassed that of Japan in the third quarter, Japan’s government said. The gross domestic product in the three months ended September was $1.415 trillion, compared with Japan’s $1.372 trillion, Japan’s Cabinet Office said today.

Bank Loans

China Real Estate Business reported that the four biggest state banks won’t issue new loans to developers for the remainder of the year. The banks had met their allotted targets for loans to property developers for the year, the newspaper reported.

Agricultural Bank of China and China Construction Bank Corp. denied the report, Caixin Online reported today, citing unidentified people at the banks. Agricultural Bank of China rose 1.1 percent to 2.75 yuan, erasing a 1.5 percent drop earlier. Industrial & Commercial Bank of China Ltd., the biggest lender, jumped 6.8 percent to 5 yuan.

Wang Zhenning, a Beijing-based press official at ICBC said he wasn’t clear about the issue. Yang Yan, a press official at Construction Bank, couldn’t immediately comment. Calls to the other two banks’ press offices weren’t answered.

Goldman Sachs Group Inc. said the brokerage remains “constructive” on the country’s equities in the coming quarter and would view any decline as “buying opportunities” for medium term upside, analysts led by Helen Zhu said in a report.

‘Market Confidence’

Interest rates aren’t close to levels to impair growth, valuations are “far from over-stretched” and more funds will shift to equities from property and other commodities, they said.

“Despite high likelihood of rapid monetary tightening, we remain constructive on the markets over the coming quarters,” the analysts said. “Historical precedent shows that early stage tightening tends to reinforce market confidence in growth momentum.”

Consumer prices jumped 4.4 percent in October, the fastest pace in two years, and more than the 4 percent median forecast in a Bloomberg News survey of 28 economists, according to the statistics bureau. September prices rose 3.6 percent. The government’s full-year inflation target is 3 percent.

The People’s Bank of China on Nov. 10 ordered an increase in bank reserve requirements by 50 basis points, the first nationwide boost since May. Some lenders, including Bank of Communications Co., have to lift their reserve ratios by an additional 50 basis points, a person with direct knowledge of the matter said. The increases take effect this week.

Metal Outlook

China’s metals producers may extend declines in the “near term” on speculation the country will further tighten monetary policy, according to CICC.

Jiangxi Copper, the nation’s largest producer, slumped 3.7 percent to 39.78 yuan. Chalco, as the aluminum producer is known, fell 1.7 percent to 11.35 yuan, extending the 8.1 percent slump on Nov. 12.

“If you look at China’s actual commodity demand, it is not growing that much at the moment,” Mowat said. Investors are “ignoring this because of QE2,” he said, referring to the U.S. government’s quantitative easing program based on U.S. debt purchases to boost its economy.

--Chua Kong Ho, Irene Shen. Editors: Allen Wan, Richard Frost