Pedestrians walk past an electronic display showing the closing figure of the Hang Seng Index in Hong Kong Monday. The Hang Seng Index jumped 3.1 percent to 20,912.18, the highest close since April 30. Jerome Favre / Bloomberg news

The Hang Seng Index rises 3.1% to close at 20,912.18

Hong Kong stocks surged over 3 percent Monday, rising for the ninth consecutive trading day, the longest winning streak in four years, after nation's central bank allowed the yuan to appreciate against the US dollar Saturday, making the city's assets more affordable to mainland investors, as well as boding well for the earnings prospects for locally-listed mainland firms.

The Hang Seng Index jumped 625.47 points, or 3.1 percent, to close at 20,912.18, the highest close since April 30. The gauge has increased 7.9 percent in the past nine days, the longest run of gains since the 10 trading days to February 27, 2006. The streak four years ago came amid optimism that a cycle of interest-rate increases in Hong Kong was coming to an end.

"This announced policy is a paradigm change, of which impacts are long term. Thus, financial markets will be re-rating Chinese stocks for long-term attractiveness," said Lei Wang, who helps oversee $20.2 billion at the New Mexico-based Thornburg International Value Fund. "I have been expecting this RMB paradigm change, and our Chinese stock exposures have already taken that as one of our long-term assumptions. In the short term, airlines and financial stocks on the Hong Kong market will benefit most."

The Hang Seng China Enterprises Index, which tracks the performance of Hong Kong-listed major Chinese companies, or the so-called H-shares, surged 511.73 points, or 4.4 percent to 12,134.42, the largest gain since June 10 last year.

China's yuan climbed the most in 18 months against the dollar after the People's Bank of China said it would allow the currency greater flexibility to move, boosting revenue and business prospects for nations that sell products to the world's third-largest economy.

The central bank has indicated it is abandoning the 6.83 yuan peg to the dollar adopted to shield exporters during the global financial crisis.

American lawmakers had argued that the yuan peg was an unfair subsidy for China's exporters. A stronger yuan may enable policymakers to tame inflation without restraining the economy, a prospect that is seen as positive for the future earnings of mainland companies.

The Hong Kong Monetary Authority said it sees no need to change the Hong Kong dollar's peg to the US dollar. The HKMA said on June 15 that local stock and property prices may be driven higher once Beijing allows the yuan to resume gains as the city becomes more affordable to mainland investors.

Mainland airlines are major beneficiaries of an appreciation of the yuan given their foreign-currency-based debt, said Jing Ulrich, Hong Kong-based chairwoman of China equities and commodities at JP Morgan.

Air China rallied 6 percent to HK$8.49. China Southern Airlines, the nation's biggest carrier, jumped 6.5 percent to HK$3.75.

The Hang Seng Index has dropped 4.4 percent this year as worries about budget deficits in Europe and credit tightening by Beijing dented confidence in the strength of the global economy. Shares on the benchmark index are priced at an average 13.8 times estimated earnings, down from 18 times on November 16, the highest level in 2009, data compiled by Bloomberg shows.

Agencies

(HK Edition 06/22/2010 page3)