SHANGHAI - Stocks on the Chinese mainland rallied on Wednesday, spurring the biggest gain for the benchmark index in a year, on speculation the government is seeking to bolster the share market after valuations dropped to record low levels.

Haitong Securities Co led a rally for brokerages after Xinhua News Agency reported that regulators approved cross-border exchange-traded funds.

China Minsheng Banking Corp surged the most in seven weeks as banks extended Tuesday's rally after Central Huijin Investment Ltd began buying shares of lenders.

Rolling stock producers CSR Corp and China CNR Corp rose more than 4 percent after the 21st Century Business Herald reported that their parent companies might get cash injections from the government.

The Shanghai Composite Index advanced 71 points, or 3 percent, to 2420, the most since Oct 15, 2010. The CSI 300 Index gained 3.6 percent to 2644.76.

Central Huijin's move was a flashpoint, boosting investors' confidence and buying sentiment," said Wu Kan, a fund manager at Dazhong Insurance Co, which manages $285 million.

"The government's move fueled speculation that China's stocks are undervalued."

The Shanghai Composite Index has tumbled 14 percent this year, driving down estimated price earnings to 11.2 times, compared with the record low of 10.8 times set on Oct 10, according to data compiled by Bloomberg.

Stocks have fallen as the government raised interest rates and reserve-requirement ratios for banks to cool inflation that's at the highest level in almost three years.

Inflation probably eased to 6.1 percent in September from 6.2 percent in August, according to the median forecast of economists in a Bloomberg survey. The data are scheduled to be released on Oct 14. Consumer prices rose 6.5 percent in July.

A gauge of financial companies in the CSI 300 surged 4.5 percent, the most among the 10 industry groups.

The China Securities Regulatory Commission has approved cross-border exchange-traded funds (ETF), Xinhua reported, citing an unidentified person.

ETFs mimic the performance of an index and trade like stocks. Chinese investors may benefit from exchanges' plans to introduce ETFs tracking overseas indexes as they currently have limited access to foreign stocks.

Central Huijin bought 14.6 million Shanghai-listed A shares in ICBC, 7.38 million yuan-denominated shares of China Construction Bank Corp, 39.1 million shares in Agricultural Bank Ltd and 3.5 million shares in Bank of China Ltd, the four lenders said in statements to the Hong Kong and Shanghai stock exchanges.

Bloomberg News

(China Daily 10/13/2011 page16)