China, Hong Kong shares soar

Chinese stocks started 2011 in a bullish mood, giving a lift to Hong Kong's market, as investors snapped up beaten down shares of companies most likely to benefit from a recovery in global economic activity. Data showing that manufacturing accelerated in the US and Europe in December and that growth in China and India slowed to more sustainable levels lifted investor appetites for risky assets.
The Shanghai Composite, Asia's worst performing market in 2010 with an over 14 percent decline, rose 1.6 percent. Hong Kong's Hang Seng rose 1 percent on good volume as turnover rebounded from the thin levels seen over the holidays. China's purchasing managers' index (PMI) published over the weekend showed that manufacturing growth slowed in December while factory inflation moderated, trends which investors hope will lessen the need for harsher tightening policies from Beijing.
"The latest PMI data signals that China's economy is not overheating and that existing tightening policies have taken effect," said Meng Xiangjuan, analyst at Shenyin Wanguo Securities Co. "If the PMI data keeps falling, policymakers are likely to hold off certain tightening measures." A plunge in China's money market rates also signalled that a cash crunch in the financial system that had pegged the markets back in December was easing.
The materials sector rose as a rally in commodity prices, in particular coal, showed few signs of letting up. Optimism over demand on the back of a recovering global economy and supply disruptions in Australia due to heavy flooding is supporting coal prices, benefiting Chinese producers.
Cyclical companies - those most directly affected by changes in economic activity - were good bets over the next few months, said a trader at Daiwa Capital, saying they would benefit from increased capital expenditure in the last quarter. State-owned China Shenhua Energy Co Ltd, the world's top producer of coal by market value, rose 2 percent in Shanghai, while Hong Kong-listed Shenhua shares were up 2.9 percent.
Australia's biggest floods in decades have forced evacuations of mining areas and curtailed coal exports as major miners cancelled shipments and declared force majeure. Yanzhou Coal Mining rose 3.1 percent to a record high as it extended gains after breaking out of a tight range late last month.
Shipping-related stocks also advanced on optimism that stronger manufacturing globally would boost demand for exports. Container port operator Cosco Pacific rose 4.5 percent, while China Shipping Container Lines jumped 5 percent. Chinese property counters, trading at low valuations compared to their historical averages, jumped after a local media report said authorities might delay a property tax due to disputes among government departments.
China's State Council, the cabinet, has repeatedly vowed to start a trial on property taxes as soon as possible, without giving any further details about the programme. Analysts said some investors were viewing near-record-low valuations as already reflecting more curbs to come, while discounting their still-robust growth momentum.
"Valuations are already very attractive, and developers are expected to report strong 2010 growth and healthy cash flows during the upcoming earnings season," said BOC International analyst Tian Shixin. China Vanke Co Ltd, the country's biggest listed developer, jumped 7.1 percent in morning trading, while rival Gemdale Corp surged 10 percent to its daily limit.
Vanke shares trade at 9.8 times their forward 12-month earnings estimates, a discount of nearly 20 percent to their long-term median valuation, according to data from Thomson Reuters Starmine. Gemdale trades at an even wider 30 percent discount to its median valuation since 2005. "Investors also expect further tightening to have a limited impact on the industry, so any drop in share prices will attract bargain-hunting," said Tian.