June 22 (Bloomberg) -- China’s stocks rose to the highest this month on the prospect that the yuan will strengthen, increasing domestic consumption and reducing raw-material import costs for commodity producers.

FAW Car Co., which makes passenger cars in China with Volkswagen AG, climbed 3.2 percent on speculation consumers will have more purchasing power as the currency gains. Baoshan Iron & Steel Co. paced an advance for metal producers on the outlook for lower import costs. China Vanke Co. led a drop for some property developers after the nation’s planning body said home prices are poised to drop.

“Stocks related to domestic demand may outperform the broader market as the government is taking advantage of the yuan move to boost domestic spending,” said Zhang Ling, a fund manager at Shanghai River Fund Management Co.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, added 4.99, or 0.2 percent, to 2,591.20 as of 1:03 p.m. local time, after changing directions about 10 times. The gauge is set for the highest since May 31. The CSI 300 Index rose 0.3 percent to 2,789.05.

The Shanghai gauge has lost 21 percent this year, Asia’s worst performer, on concern government measures to rein in housing prices and the European debt crisis will damp growth.

China’s stocks and the yuan rose yesterday after the central bank pledged on June 19 to make the currency more flexible. In its statement, the central bank ruled out a one- time revaluation of the currency that’s been held at about 6.83 yuan per dollar since mid-2008.

Currency Plays

Investors should favor Chinese consumer and infrastructure stocks as the ending of the yuan peg signals the government’s determination to boost domestic consumption, said James McCaughan, chief executive officer of Principal Global Investors.

The currency shift “is part of a very consistent process the Chinese administration have had of repositioning their growth away from being export-led and towards more of the domestic economy,” McCaughan said. Principal Global, based in Des Moine Iowa, manages $222 billion in assets for institutional investors and retirement plans. “You would go for the domestic economy, whether it is infrastructure or consumer related.”

A gauge of consumer discretionary stocks jumped 1.5 percent, the most among the 10 industry groups in the CSI 300 Index. FAW Car gained 3.2 percent to 17.10 yuan. Anhui Jianghuai Automobile Co., a unit of China’s biggest light-truck exporter, advanced 3 percent to 7.15 yuan.

‘Substantial Upside’

“We’re basically expecting a 4 percent to 5 percent appreciation annually from 2010 into the next decade,” Jing Ulrich, chairwoman for China equities and commodities at JPMorgan Chase & Co., said in a Bloomberg Television interview. “There is a substantial upside to Chinese equities in the future years.”

Ulrich said Chinese companies that will benefit from a stronger yuan include those that import “a lot of raw materials.”

Baoshan Steel added 1 percent to 6.25 yuan. Hebei Iron & Steel Co., the listed unit of China’s biggest steelmaker, rose 0.3 percent to 4.06 yuan.

China’s move to relax its currency peg to the dollar is luring Pengana Capital Ltd. and AMP Capital Investors Ltd. to commodity stocks as they bet on rising demand in the world’s third-largest economy.

Pengana Capital has been buying iron-ore producers, said Tim Schroeders, who helps manage about $1.1 billion in Melbourne, declining to be more specific. AMP Capital, with more than $90 billion of assets, is considering increasing its holdings of commodity stocks, strategist Nader Naeimi said.

Property Stocks

Vanke, the nation’s biggest listed property developer, fell 0.3 percent to 7.32 yuan. Gemdale Corp., the fourth-largest, slid 0.6 percent to 7.12 yuan.

Chinese property prices in larger cities are poised to steadily decline as government measures start to take effect, the National Development and Reform Commission said in a report relating to 36 large and medium-sized cities. It didn’t name the cities.

The following companies were among the most active in China’s markets. Stock symbols are in brackets after companies’ names.

Shenzhen Topraysolar Co. (002218 CH) jumped the 10 percent daily limit to 21.56 yuan, heading for the biggest gain since May 11. The company produced its first batch of photovoltaic solar-energy glass on June 18 and mass production is expected to start next month, according to an exchange filing.

Tangshan Jidong Cement Co. (000401 CH) gained 8.3 percent to 15.56 yuan, set for the biggest gain since November 6, on resuming trading after announcing plans to raise 1.9 billion yuan ($279 million) in a private placing to reduce its debt.

--Zhang Shidong. With assistance from Chan Tien Hin in Kuala Lumpur. Editors: Allen Wan, Linus Chua

To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net