Monday, June 21, 2010

Hong Kong, Shanghai stocks jump as China unleashes yuan

Hong Kong and Shanghai shares jumped around 3 percent on Monday as China scrapped its currency peg and allowed the yuan to rise, boosting confidence in the global economic recovery.

Many analysts see the yuan appreciating further in coming days, with stronger purchasing power in the world's third-largest economy making China an even more compelling international investment theme. Global stocks also rose as the currency move boosted shares of companies exporting goods and raw materials to China.

"China is joining the rest of the world in supporting global demand," said Todd Martin, Asia equity strategist at Societe Generale. Hong Kong's Hang Seng index rose 3.1 percent to 20,912.18 points, with the China Enterprises Index of mainland Chinese firms ending 4.4 percent higher, its sharpest gain in over a year.

Hong Kong's equity market represents the largest pool of offshore yuan-based assets available to global investors, and will continue to benefit if Beijing allows further yuan gains, analysts at Morgan Stanley said in a note. China's key stock index, the Shanghai Composite, closed 2.9 percent, shrugging off a timid open as the yuan firmed.

The yuan rose as much as 0.43 percent in the spot market at one point, its biggest one-day gain since its revaluation in 2005. Beijing had kept the currency pegged to the US dollar for nearly two years to help its exporters weather the global downturn.

Its announcement at the weekend that it would unshackle the currency was seen as a sign that Chinese leaders believe China's economic recovery, and the global rebound, are now on more solid footing despite worries about Europe's sovereign debt crisis.

Gains in Hong Kong and Shanghai markets were broad based, with jumps in shares of Chinese airlines, automakers and other sectors seen as immediate winners from yuan appreciation, which will make purchases of fuel or parts from overseas more affordable. Financial stocks in Hong Kong rose 3 percent, with insurance companies and banks leading gains as their substantial yuan-denominated assets were seen becoming more valuable.

Ping An Insurance rose 6.5 percent, while Bank of Communications was up 6.3 percent. Property stocks also moved higher on hopes that Beijing's decision to allow greater currency flexibility now will delay any interest rate hikes or more aggressive policy action by the central bank to keep the economy from overheating.

Sun Hung Kai Properties climbed 4.3 percent. Even shares of firms seen as vulnerable to a stronger yuan were caught in the updraft, with commodity producers such as Aluminum Corp of China (Chalco) rising 5 percent. Chalco and its peers could be hardest hit over the long term as they face dollar-denominated prices for their output, while their costs are in yuan.

Highlighting the return of investor confidence, turnover on the Hong Kong stock exchange jumped to more than HK$90 billion, almost twice than the average seen in June so far. Analysts say the next strong technical resistance for the Hang Seng lies at its 200-day moving average, currently at 21,115.90, before which the 50-percent retracement of selloff from November 2009 at around 21,036 will be closely watched.


In Shanghai, airlines were the major gainers, as investors anticipated a reduction in dollar-based costs for aircraft and jet fuel, while banks and property shares also rose in active trade. China Southern Airlines ended up 8.2 percent while Hainan Airlines was among the day's biggest gainers, jumping nearly its 10 percent daily limit.

But the market, one of the world's worst-performing this year with a drop of 21 percent, still faces several negative factors including nagging worries about a further crackdown on surging property prices and a massive initial public offering by Agricultural Bank of China next month which will bring a heavy supply of new shares.

"China's macro economic environment is still uncertain. There is caution still as to what policies will be implemented," said Cao Xuefeng, analyst at Western Securities. He expected the yuan move to have a positive impact on stocks initially, but like other market watchers said it was unlikely the currency would be allowed to appreciate sharply in the near term.

Cheng Yi, an analyst at Xiangcai Securities, added: "Before the Agbank listing there will still be a lot of uncertainties." "Also, volume is still not heavy today, which indicates the rebound will not continue for very long." Turnover in Shanghai rose to 81 billion yuan ($11.87 billion), a one-and-a-half week high, from Friday's 72 billion yuan, while winning shares overwhelmed losers 858 to 45.


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