Markets

China's rate hikes make stocks a buy at banks

(Agencies)
Updated: 2011-04-08 12:52

China's repeatedly interest-rate increase measures in the past six months is spurring the world's biggest banks to say it's time to buy stocks in the fastest-growing major economy, Bloomberg News reported on Friday.

Credit Suisse Group AG boosted its 12-month forecast for the Hang Seng China Enterprises Index, predicting a 28 percent gain after the People's Bank of China (PBOC), the central bank, raised its one-year lending rate by a quarter point to 6.31 percent on April 5, the report said.

HSBC Holdings Plc increased its rating on China to "overweight," while Macquarie Group Ltd said investors should rise their holdings, it reported, adding that the Citigroup Inc also advised buying options to bet on gains.

Related readings:  Another interest rate hike 'to fight inflation'  China raises interest rate by 25 basis points  PBOC cuts yuan clearing interest rates in HK  Reserve ratio and interest rates may be adjusted

The recommendations signal confidence that the Chinese government will curb the fastest inflation since 2008 without derailing a 9 percent annual gross domestic growth forecast issued by the World Bank.

"I normally don't go along with the brokers but this time they are right," said Sandy Mehta, chief investment officer of the Hong Kong-based Value Investment Principals. "China has been pro-active in raising rates to fight inflation. Stocks are also extraordinarily cheap."

The Hang Seng has climbed 0.6 percent since the PBOC began raising interest rates in October, boosting a 9.5 percent gain in the MSCI Emerging Markets Index. When China's borrowing costs increased a similar amount from October 2004 through March 2007, the index jumped by 113 percent, the report said.

The gauge of Chinese companies listed in Hong Kong is valued at 13 times earnings, which compared with an average premium of 13 percent for the Hang Seng during the past five years, data compiled by Bloomberg show.

Vincent Chan, a Hong Kong-based analyst at Credit Suisse, Switzerland's second-biggest bank, wrote in a report on April 6 that the overall results of Chinese companies were stronger than his expectation. Chan increased his 12-month estimate for the Hang Seng to 17,500 from 16,000 and boosted his forecast for the Shanghai Composite Index of mainland-listed equities to 3,650 from 3,600, according to the report.

Meanwhile, consumer prices jumped 4.9 percent in February from a year earlier, which topped the government's year-round target of 4 percent, the report pointed out. It also said that the inflation probably accelerated to 5.2 percent in March, which would be the highest level since July 2008. The statistics bureau will release the figure on April 15, according to a preliminary schedule.

Policy makers will lift the key lending rate to 6.56 percent by year-end, according to a survey conducted by the news agency on March 22.

This week's rate increase "gets us close enough to the end of China's late tightening cycle to mitigate a key policy overhang," the report quoted Michael Kurtz, a strategist in Hong Kong at Macquarie, Australia's largest investment bank, as saying.

He upgraded Chinese stocks to "market-weight" from "underweight", it said.