China’s Stocks Rally to May High as Hong Kong Erases Brexit Loss

(Bloomberg) -- China's stocks rose to a two-month high as commodity companies rallied and speculation grew the nation may provide stimulus to support growth. Hong Kong equities erased losses accumulated after the U.K. voted to leave the European Union.

The Shanghai Composite Index advanced 1.9 percent at the close as a gauge of materials producers rose the most since May. The Hang Seng Index extended its increase since Britain's referendum to 0.9 percent, as London-based HSBC Holdings Plc paced moves by companies with links to Europe. China Vanke Co., which hadn't traded in Shenzhen since Dec. 18 amid a battle for control of the developer, plunged by the day's 10 percent limit.

Speculation that global central banks will act to contain the fallout from the U.K.'s vote has underpinned a rebound in riskier assets, boosting precious metals and other commodities. While China has left its main rates at a record low since October, analysts at Standard Chartered Plc and Commerzbank AG expect the nation's central bank to lower lenders' reserve requirements as soon as in July to boost economic growth.

“The market is expecting some stimulus policy” following disappointing Chinese economic data and Britain's decision to leave the European Union, said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd. “Chinese stocks are still in a good run. The Shanghai Composite may test the 3,000 resistance level.”

Chinese industrial companies' profits climbed 3.7 percent in May from a year earlier, the government said last week, slowing after a 4.2 percent growth the previous month. The nation's manufacturing purchasing managers index stood at 50 in June, the line dividing improvement from deterioration, data showed Friday.

The Shanghai Composite climbed to 2,988.60, paring this year's loss to 16 percent, still among the world's worst-performing benchmarks of 2016. The Shenzhen Composite added 1.6 percent after falling as much as 0.8 percent.

Materials Rally

A measure of materials companies led gains by mainland stocks, with Jiangxi Copper Co. surging 9.5 percent in Shanghai and Shandong Gold Mining Co. advancing 5.6 percent. China's steel rebar futures rose to a two-month high, while contracts for aluminum and copper also climbed.

The yuan extended losses against its peers even as the greenback retreated on fading expectations of a U.S. rate increase this year. A Bloomberg replica of a 13-currency index tracked by the People's Bank of China dropped 0.2 percent to 94.71, the lowest since at least October 2014.

“A weakening yuan is expected to bring imported inflation with commodity prices rising domestically,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “Commodity stocks attracted a lot of speculative capital as they were oversold in China's market rout.”

The Hang Seng Index rose 1.3 percent in Hong Kong, while the Hang Seng China Enterprises Index climbed 1 percent. Hong Kong markets were closed for a holiday Friday.

“Hong Kong will fare relatively better because the U.S. is unlikely to raise interest rates,” said Ben Kwong, a director at brokerage KGI Asia Ltd. in Hong Kong.

HSBC and Standard Chartered Plc climbed at least 1.7 percent in Hong Kong. Italian luxury-goods maker Prada SpA jumped 6.7 percent. Cheung Kong Property Holdings Ltd. rose 4.2 percent and Sun Hung Kai Properties Ltd. gained 4 percent after Brexit-induced turmoil prompted traders to push back bets the Federal Reserve will raise borrowing costs. With Hong Kong's currency pegged to the dollar, interest rates in the city track those in the U.S.

Vanke Diverges

Vanke plunged in Shenzhen. The Chinese developer said it won't hold a shareholders' meeting over a proposal by Baoneng Group, the company's largest shareholder, to remove most of the directors on its board. Vanke's shares climbed 6.7 percent in Hong Kong, with UOB Kay Hian analyst David Yang attributing the divergence to cheaper valuations in Hong Kong.

West China Cement Ltd. tumbled 24 percent as trading resumed for the first time since its deal to be acquired by Anhui Conch Cement Co. collapsed. Shares were suspended last week after plunging by a record amid speculation that the deal was in trouble. Anhui Conch climbed 1.8 percent in Hong Kong.

--With assistance from Fox Hu To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net. To contact the editors responsible for this story: Robin Ganguly at rganguly1@bloomberg.net, Phani Varahabhotla, Philip Glamann