September 19, 2008, 6.28 pm (Singapore time)

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China stocks soar 9.5% on official aid package

* All shares rise their daily limits
* Chinese stocks listed abroad rise more
* Hopes for more market-boosting steps
* Spectacular debuts in Shenzhen show speculators back
* Scepticism over long-term outlook

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SHANGHAI - Chinese stocks soared over 9 per cent on Friday in response to an unprecedented package of government measures to support the market, and as a rebound of equities overseas eased fears for the global financial system.

The Shanghai Composite Index, which sank to a new 22-month closing low on Thursday, ended 9.46 per cent higher at 2,075.091 points, its biggest daily gain since October 2001.

Every one of the more than 1,600 shares on the Shanghai and Shenzhen exchanges jumped by its daily limit in the early morning and then remained there throughout the day. Most stocks have 10 per cent limits, while some have 5 per cent.

'The rescue effort will continue to have an impact for weeks - after all, this is the first time in the 18-year history of the stock market that authorities are taking such a step,' said Zhang Qi, analyst at Haitong Securities.

The government announced after the market closed on Thursday that Central Huijin, an arm of the country's sovereign wealth fund, would help stabilise the stock market by buying shares in listed companies, including three top state-owned banks.

Authorities also scrapped the 0.1 per cent stamp tax on purchases of equities, and urged state-owned enterprises to buy back shares of their listed units from the market.

To rise further
Analysts said the index, which had plunged 69 per cent from last October's record peak, might climb a further 10 per cent or so in coming weeks, though slowing corporate profit growth and heavy supplies of fresh equity could still weigh on the market in the long term.

Rises on Friday in overseas-listed Chinese stocks, which are not subject to daily price limits, suggested further room for domestically listed shares to climb. Industrial & Commercial Bank of China's Shanghai A shares gained 10 per cent, but its Hong Kong H shares were up over 17 per cent.

As the initial impact of the support package wears off in coming days, bank shares are likely to outperform since the government said three top banks in particular would be a target of Huijin's buying, analysts said.

Turnover in Shanghai A shares was active on Friday morning but almost ground to a halt in the afternoon because so few investors were willing to sell.

Limited rescue efforts for the stock market have failed in the past; after the stock trading tax was cut in April, the index jumped 9.29 per cent on the following day, only to resume sliding within a couple of weeks.

But analysts think the latest package has a better chance of succeeding because stock valuations have fallen to levels where they are no longer expensive by historical standards.

The average price-earnings ratio of China's local-currency A shares was at a record low of 16 times historic earnings on Thursday, a level last hit in late 2005 when the market was ending a four-year slump.

The index had already begun rebounding during the day on Thursday from near technical support at 1,783 points, its high in 2004. It faces immediate resistance at 2,140, the top of its downtrend channel from late July.

Scepticism
'We think the authorities are determined to put a floor under the market and if the current measures are not enough they will follow up with others, including an economic stimulus package,' investment bank ING said in a report.

However, some analysts continue to doubt that the market has found a long-term floor. Morgan Stanley advised investors to sell into the rally.

'The rescue does draw a hard defence line, and the stock markets should stabilise, but more gradual corrections still are likely ahead,' it said in a report.

'In our view, both the A share and H share markets are having a more fundamental problem than just poor sentiment - an earnings recession coming - and we do not see this priced in yet.'

Two shares staged spectacular debuts in Shenzhen on Friday, suggesting the government's support package had encouraged speculators to return to the market.

Zhejiang Quartz Crystal Optoelectronic Technology jumped 232 per cent from its initial public offer price to 50.80 yuan, far above analysts' expectations of around 19 yuan. Sichuan Crun surged 254 per cent to 37.00 yuan, above expectations of 12 yuan.

Inner Mongolia Yili and Bright Dairy were suspended on Friday after plunging earlier this week because of China's scandal over chemically contaminated milk. -- REUTERS