SHANGHAI - Mainland's stocks rose, extending the best monthly gain in a year, on the prospect the government will reverse policies aimed at slowing the world's third-biggest economy after manufacturing expanded the least in 17 months.
"The market has reached a consensus view that the government will ease current measures to rein in economic growth as data show growth is already slowing down," said Wang Zheng, a fund manager at Jingxi Investment Management Co in Shanghai.
The Shanghai Composite Index gained 35.01, or 1.3 percent, to 2672.52 at the 3 pm close, the highest since May 24. The CSI 300 Index rose 1.7 percent to 2917.27, led by consumer and health-care companies. The Shanghai index rallied 10 percent last month, the most since July last year when it gained 15 percent, on expectations the government will ease property curbs and allow more lending to offset a slowdown in economic growth. The measure is still down 18 percent in 2010 on concern measures to control real-estate speculation and accelerating inflation will damp earnings.
The Purchasing Managers' Index fell to 51.2 in July from 52.1 in June, the Federation of Logistics and Purchasing said on its website on Sunday. That was the lowest since China's manufacturing stopped contracting in March 2009 and was less than the median forecast of 51.4 in a Bloomberg News survey of 15 economists. A reading above 50 shows an expansion.
Another purchasing managers' index released on Monday by HSBC Holdings Plc and Markit Economics fell to 49.4 in July from 50.4 a month earlier, the first contraction in 16 months.
"The government's tightening policies have already achieved the desired effect," said Zhang Kun, a strategist at Guotai Junan Securities Co in Shanghai. "There won't be any intensified measures going forward. The market can breathe a sigh of relief."
Morgan Stanley said in a report it expects a "visible softening in policy tone" in the third quarter and the government to introduce measures to bolster economic growth in the fourth quarter.
A gauge of consumer discretionary stocks gained 2.1 percent in the CSI 300, while a measure of consumer staples rose 3.2 percent.
Rising prices may boost the earnings of makers of consumer goods. Inflation, which eased to 2.9 percent in June, may climb above 3 percent in the next few months before falling at the end of this year, UBS economist Wang Tao wrote in a report last week.
China-listed companies posted a 50 percent gain in net income on average in the first half, the Shanghai Securities News reported, citing 264 companies that have released earnings results as of July 31.
The Shanghai Composite may be set for another "wave" of gains after completing a so-called correction that lasted for almost a year, according to Elliott Wave International Inc. China's stocks may outperform global markets in the next three months as valuations are "very cheap", liquidity improves and the threat of further policy tightening recedes, according to Nomura Holdings Inc's equity strategist Sean Darby.
Essence Securities Co, ranked second for strategy research by New Fortune magazine last year, said it's turning negative on the nation's shares because of inflation concerns.
Hang Seng gains
Hong Kong stocks climbed after mainland's manufacturing grew at the slowest pace in 17 months, prompting speculation the country won't require more tightening policies, and as data showed the city's home prices rose for a fifth week.
The Hang Seng Index gained 1.8 percent to close at 21412.79. The Hang Seng China Enterprises Index climbed 2.3 percent to 12181.45.