Asia stocks rebound on hopes for China boost

By Kevin Plumberg

HONG KONG (Reuters) - Most Asian stock markets edged higher on Wednesday, rebounding from a two-year low as Chinese shares surged on hopes for policies from Beijing to jumpstart growth, though many analysts said it was a long shot.

The dollar struggled as crude oil crept above $115 a barrel and gold prices edged higher, taking some of the steam out of the U.S. currency's recent surge to a seven-month high.

World stock markets slid to the lowest since September 2006 on Tuesday, with investors increasingly skeptical about earnings expectations for 2009 given the mixed results so far in 2008 and constant reminders about instability in the financial sector.

However, most Asian indexes turned higher as cheap valuations proved irresistible, especially with markets rife with chatter about fiscal stimulus in China.

"Bargain hunters have returned to the market on talks that a rescue package is on the way," said Francis Lun, general manager from Fulbright Securities in Hong Kong. "We are all waiting for a miracle," Lun added.

Hong Kong's Hang Seng index <.HSI> rose 1.9 percent, after closing at a one-year low on Tuesday, with shares of China Mobile <0941.HK> providing the biggest boost.

Shares of Asia's largest wireless carrier, up 2 percent, hit a one-year low before the rally swept through the region.

The Shanghai composite index <.SSEC> surged 6 percent after touching a 20-month low. The index is watched by many global investors as a gauge of risk taking and a leading indicator for the world's fastest growing economy.

The MSCI pan-Asia equities index <.MIAS00000PUS> edged up 0.3 percent after earlier plumbing the lowest since July 2006.

The MSCI all-countries world index <.MIWD00000PUS> on Tuesday tumbled to a 23-month low, down 18 percent year-to-date.

Japan's Nikkei share average <.N225> rose 0.2 percent, tagging along for the rally, with retail companies like clothing chain operator Fast Retailing Co Ltd <9983.T> paving the way higher.

TOO EARLY FOR FISCAL STIMULUS IN CHINA?

Despite the sudden turnaround in Asian stocks, apprehension about the earnings outlook was rife, especially after the Bank of Japan on Tuesday described the world's second-largest economy as "sluggish" -- a term it has not used since the Asian financial crisis a decade ago.

Donald Straszheim, vice chairman of Roth Capital Partners in Los Angeles and a long-time China analyst, said the Chinese stock market, the worst performer this year, will continue to fall because of the toxic concoction of slowing growth and high inflation.

He expects earnings to rise 15 percent in China this year, down quite sharply from 30 percent to 45 percent pace enjoyed by most sectors in 2006 and 2007.

"Shanghai has proven to be a very emotional market, and is likely to stay that way," said Straszheim in a note to clients.

Stephen Green, head of China research with Standard Chartered Bank in Beijing, said that given economic growth is still expected to stay above 8 percent this year and next, it is too early for the government to squeeze its budget to boost growth.

Rather, Beijing should consider relaxing loan quotas to stimulate bank lending to support growth.

"It is too early for a fiscal stimulus package, and we should be responsible about calling for one," he said in a research note. "There is still room for monetary policy before we try fiscal policy."

Central bank officials have been struggling to balance concerns about rapidly slowing growth rates around the world with persistent inflation.

Two Federal Reserve officials known for their tough stances against price pressures stressed overnight the central bank has to be prepared to raise interest rates to keep inflation at bay if slowing growth does not do the trick.

"Until we have a clear sense of what will prevail, monetary policy-makers must remain poised to act if slowing growth fails to contain inflationary pressures," said Richard Fisher, president of the Dallas Fed.

Higher borrowing costs might be the last thing that corporate management wants at a time when consumer demand is drying up.

After weeks of liquidation of positions in the metals markets, which have helped to push up the U.S. dollar, investors slowed down to survey the scene.

The euro was largely unchanged at $1.4773, but was up from a six-month low around $1.4630 hit on Tuesday.

The dollar rose 0.2 percent to 109.85 yen, though it was struggling to test a seven-month high of 110.67 yen reached last week.

Metals markets were relatively quiet compared with the last few days. Gold rose 0.3 percent in the spot market to $815.95 an ounce, spending only a few days trading below $800.

The September U.S. light crude contract rose 37 cents to $114.90 a barrel, gravitating around the $115 mark.

Oil is still up 20 percent so far this year but its sharp decline in the last month on expectations for slowing demand has stung a variety of investors from institutions to hedge funds.

U.S. gasoline inventory data due later in the day is expected to show a fourth consecutive weekly decline.

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