Stocks jumped 7.63 percent yesterday, the highest in almost four months, on investor confidence that the government would introduce a package to boost the economy.
The benchmark Shanghai Composite Index surged 178.81 points to close at 2523.28, with 893 of the 912 stocks closing higher.
The Shenzhen Component Index rose 7.13 percent, or 567.58 points, to close at 8531.15, with the turnover on the two bourses reaching 65.7 billion yuan (US$9.6 billion).
Frank Gong, head of JPMorgan Chase & Co's China research, said in a research note on Tuesday that the government was considering an economic stimulus package of 200-400 billion yuan (US$29.17-58.34 billion) and could ease its monetary policy later this year.
"That to some extent has restored investor confidence, and bargain prices have enticed investors to start browsing stocks again," Wu Feng, TX Investment and Consulting Co analyst, said.
Gong's note said: "The package will include tax cuts and measures to stabilize the domestic capital market and support a healthy development of the property market."
The fall in the inflation rate will provide a good macro-environment for the central bank to cut lenders' reserve requirement ratio and ease the monetary policy, he said.
But Stephen Green, head of research at Standard Chartered (China), said it was too early for a fiscal stimulus package because the economy was still robust. "There is still room for monetary policy before we try fiscal policy," he said in a research note.
The government raised electricity on-grid charges by an average of 0.02 yuan per kWh from yesterday to help cut producers' losses and encourage more power generation.
The increase appears small, but the stock market has reacted very positively to the power generators, Citi China economist Peng Cheng said. "The removal of some restrictive factors could help boost industrial activity in the coming months."
Power companies' shares soared yesterday, with Guangxi Guidong Electric Power Co gaining 10 percent and Shanghai Electric Power Co, 7.46 percent.
Positive remarks of and news from the government to restore investor confidence are seen as yielding results.
Articles in the Securities Daily yesterday said the government was revising rules to ease the market liquidity pressure brought about by the flood of unlocked shares, such as introducing secondary offering.
In addition, the China Insurance Regulatory Commission clarified on Tuesday that it had not guided insurance firms to sell stocks.
Large capitals led yesterday's rally, with the Bank of China climbing 9.22 percent, China Construction Bank 7.62 percent and PetroChina 6.19 percent.
(Xinhua News Agency August 21, 2008)
