Aug. 13 (Bloomberg) -- China’s stock market will resume its rally after entering a so-called correction as economic growth accelerates and earnings recover, according to Citic Securities Co., the nation’s biggest brokerage by market value.

The Shanghai Composite Index plunged 4.7 percent to a four- week low yesterday as the government said its $4 trillion yuan ($585 billion) stimulus package can’t completely offset falling export demand. The gauge entered a correction after the retreat from this year’s high surpassed 10 percent. The measure is up 72 percent in 2009.

“We see this decline as a normal correction after five months of steady gains,” said Citic Securities strategists led by Yu Jun, in a report today. “The stock market will continue to rally in the second half as the global and Chinese economies recover and as corporate profits continue to improve.”

The brokerage’s comments contrast with Shenyin & Wanguo Securities Co., which said this week investors should sell the nation’s stocks as the market is in “bubble territory” and share prices already reflect expectations for improving economic growth and profits.

The Shanghai gauge more than doubled from last year’s low as record new lending and the government’s stimulus plan revived growth in the world’s third-largest economy. Gross domestic product expanded 7.9 percent in the second quarter from a year earlier, rebounding from the weakest growth in almost a decade. The benchmark index, which plunged 65 percent last year, more than doubled in both 2007 and 2006.

Stock Valuations

The Shanghai gauge rose 0.9 percent to 3,140.56 at the close, erasing an earlier 1.7 percent loss. The index trades at 33.9 times the reported profit of its companies, compared with 17.8 times for the MSCI Emerging Markets Index.

China’s economy, which avoided following the U.S. and Europe into recession, is yet to cement a recovery as factories have too much capacity and shipments abroad are weakening, officials said this month.

The government “will be biased towards protecting growth and won’t change their policy before signs of improvement in private investment, consumption, corporate profitability and employment,” Citic Securities said.

Goldman Sachs Group Inc. this week raised its forecast for China’s gross domestic product growth in 2009 to 9.4 percent, noting that weakness in the global economy would deter policy makers from tightening too soon.

‘Speculative Mania’

Individual investors rushed into equities in the past month as the economy rebounded and regulators lifted a nine-month moratorium on initial public offerings, prompting Grantham Mayo Van Otterloo & Co.’s Edward Chancellor to warn on July 31 of the return of “speculative mania” in the nation’s stock market.

“It’s difficult to find a catalyst that will further lift economic prospects,” said Yuan Yi, Shanghai-based analyst at Shenyin Wanguo, in a report Aug. 11. “China’s stock market is in bubble territory, which means it’s being held up mainly by excess liquidity and not profit expectations.”

Investors opened more than 2.4 million accounts to trade stocks in the four weeks to Aug. 7, the most since December 2007, data from the country’s clearing house show.

The value of shares traded in China on July 29 surpassed the combined amount in the U.S., U.K. and Japan for the first time on record. China State Construction Engineering Corp., which traded for the first time that day, drew 1.85 trillion yuan of orders for the world’s largest IPO this year, more than the market capitalization of Norway, Russia and at least 48 other advanced and developing nations.

‘No Longer So Cheap’

Goldman Sachs Group Inc. chief economist Jim O’Neill said Chinese stocks are “no longer so cheap” and countries such as Indonesia, Turkey and Poland may offer investors better opportunities.

“I wouldn’t be surprised by a correction,” O’Neill said in a Bloomberg Television interview yesterday. He said China is probably the country most likely to benefit from the global recession as consumer spending drives growth.

Retail sales rose 15.2 percent in July, more than economists forecast.

To contact the Bloomberg News staff for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

Last Updated: August 13, 2009 03:40 EDT