China's Stock, Currency Gains Reflect Economy's Rise (Update4) By Zhang Shidong and Jake Lee Jan. 11 (Bloomberg) -- China's stock market topped $1 trillion for the first time and the yuan rose past the Hong Kong dollar, reflecting an economy that's grown 10-fold since Deng Xiaoping opened the Communist nation to international investment in 1978. The value of shares on the Shanghai and Shenzhen stock exchanges more than tripled in the past year and reached $1.01 trillion as of yesterday's close, according to data compiled by Bloomberg. The yuan climbed to more than 1 per Hong Kong dollar today for the first time in 13 years. Economic growth has averaged 9.6 percent in the past five years, driven by record trade surpluses that pushed China's foreign-exchange reserves to $1 trillion. That's prompted U.S. and European pressure for a more flexible yuan and made China's stocks the most expensive relative to earnings in Asia. The gains reflect a ``fast and amazing assimilation of capitalist culture, the fastest I've ever seen,'' said Virginie Maisonneuve, who helps oversee $230 billion globally at Schroder Investment Management Ltd. in London, one of 53 overseas firms allowed to invest directly in China's domestic market. ``Will it be a straight line up? No. But, is it a long-term trend? Yes.'' China's economy grew 10.7 percent in the first nine months of last year after overtaking the U.K. and France in 2005 to become the world's fourth largest. The government is scheduled to announce 2006 growth figures on Jan. 25. Stock Rally China's benchmark stock indexes have surged since July 2005 after plunging by more than half in the four preceding years. The rally came after the government implemented a plan to make more than $200 billion of mostly state-owned stock tradable, the biggest ownership shakeup in the market's 16-year history. The Shanghai and Shenzhen 300 Index is trading at 34 times earnings, compared with 16 times for Australia's S&P/ASX 200 Index and 14 times for Hong Kong's Hang Seng Index. The 300 Index fell 1.1 percent today, paring its 12-month gain to 129 percent. ``Excessive liquidity has pushed the market to a level that's unsustainable in terms of fundamentals,'' said Chen Shide, who manages the equivalent of $212 million at GF Fund Management Co. in Guangzhou, southern China. ``You'd better stay away and sit tight for the moment as most stocks are expensive.'' Shares of Industrial & Commercial Bank of China have jumped 77 percent in Shanghai since the company's world-record IPO in October. The surge pushed ICBC ahead of HSBC Holdings Plc as the third-biggest bank globally with a market value of $226 billion. China Life Insurance Co. became the world's second-most valuable insurer after its yuan shares more than doubled on their first day of trading this week. Yuan Gains China now ranks as the third-biggest stock market in Asia by value, after Japan on $4.8 trillion and Hong Kong's $2.1 trillion. The U.S. market, valued at $17.4 trillion, is the world's biggest. ``China's market value will be able to soon catch up with Japan, if the government keeps up the fast pace of new share sales,'' said Lin Tongtong, who manages about $182 million at HSBC Jintrust Fund Management Co. in Shanghai. The yuan rose to 1.0004 per Hong Kong dollar and 7.7949 to the U.S. currency at 5:30 p.m. in Shanghai, the biggest gain since Nov. 29, according to Bloomberg data. The currency has advanced 6.2 percent since China ended a decade-old link to the dollar in July 2005. The U.S. and European governments say the yuan is still undervalued and are pressing China to relax controls to ease trade imbalances. China's trade surplus swelled 74 percent to a record $177.5 billion last year as exports surged, the government said today. ``This reinforces the story that China's still got huge surpluses and needs to deal with them,'' said Thio Chin Loo, senior currency strategist at BNP Paribas SA in Singapore. ``The pressure for more gains isn't going to go away.'' Hong Kong Dollar Gains in the yuan may add to pressure on Hong Kong to adjust a 23-year-old currency peg to the dollar to reflect growing economic ties with China. The Hong Kong Monetary Authority says any change would rock investor confidence and has spent the past three years stopping currency appreciation. ``Breaking 7.80 is psychologically impressive, but it's just a passing point or a passing ceremony,'' said C. H. Kwan, a Tokyo- based senior fellow at Nomura Institute of Capital Markets Research, a unit of Japan's biggest brokerage. ``The Hong Kong dollar is likely to remain pegged to the U.S. dollar at a central rate of 7.80 in coming years, even as the yuan heads higher.'' Hong Kong's de-facto central bank prevents its currency from trading more than 5 cents either side of 7.80 per U.S. dollar. Share Sales The Shanghai and Shenzhen stock exchanges were set up in 1990, more than a decade after Deng, successor to Mao Zedong as China's paramount leader, ended three decades of Communist economic policies and adopted pro-market reforms. The government has pushed overseas-traded companies such as China Life to sell shares in Shanghai to help develop the domestic markets, improve corporate governance and widen investor choice. Previously, the smaller, state-owned manufacturers that dominated the exchanges weren't the driving force of the world's fastest- growing major economy. After tripling in size, China's stock market capitalization is equal to 46 percent of the $2.2 trillion economy. The U.S. market is equivalent to 126 percent of its economy, while the ratio for Hong Kong is 649 percent, according to Bloomberg data. ``China is emerging as an economic powerhouse and the status of the stock market will be more prominent,'' said Li Huiyong, an economist at Shenyin & Wanguo Securities Co. in Shanghai.