Buy China Stocks in Second Half as Tightening Eases, CLSA Strategist Says

Investors should avoid buying China’s stocks until the third quarter when the government starts unwinding measures to curb asset bubbles, said Christopher Wood, chief equity strategist at CLSA Asia Pacific Markets.

China’s stocks plunged the most since August yesterday on concern government steps to cool the property market and European austerity measures will hurt economic growth. The Shanghai Composite Index dropped 136.69, or 5.1 percent, to close at 2,559.93, the lowest since May 4, 2009. The measure rebounded 1.4 percent today.

“I don’t think we’re near the end of the monetary tightening cycle,” Wood, the second-ranked Asia strategist in Institutional Investor magazine’s annual poll, said in an interview yesterday at the CLSA forum in Shanghai. “The government only started taking more aggressive measures in April. Buy stocks in the third quarter.”

China last month imposed a ban on loans for third-home purchases and raised mortgage rates and down payment requirements. The central bank ordered lenders this month to set aside more deposits as reserves for a third time in 2010.

Even with the tightening measures, property prices jumped a record 12.8 percent in April from a year earlier and consumer prices rose 2.8 percent, the fastest pace in 18 months.

Premier Wen Jiabao said the government will “decisively” contain excessive increases in housing prices in some cities and curb growth of industries with overcapacity, the official Xinhua News Agency reported May 15. China should keep the strength of macroeconomic controls “reasonable” and boost policy coordination, Xinhua said, citing Wen.

Property Outlook

Chinese stocks will only “bottom” when it becomes clear the government’s tightening is coming to an end, said Wood, who is based in Hong Kong. Property companies would be better investments than banks once policy eases as they have been “beaten down more,” he said today. “So far, there is no evidence of any easing.”

CLSA said it expects the central bank to raise interest rates in the second half of the year. The nation’s property prices will fall this year, hurting the outlook for other industries such as commodities, Wood said.

The Shanghai stock index has lost 22 percent in 2010, the world’s fourth-worst performer among the 93 gauges tracked by Bloomberg, after surging 80 percent last year. The measure entered a bear market on May 11 after falling 21 percent from its Nov. 23 high.

“Investors are worried that more property tightening is on the way even as Europe throws up more uncertainties about the global economy,” said Michelle Qi, a Shanghai-based portfolio manager at Bank of Communications Schroders Fund Management Co., which oversees about $6.5 billion.

China Banks

China’s stocks rebounded today after Morgan Stanley said the European debt crisis may spur the government to put further tightening measures on hold.

The brokerage upgraded the nation’s banks to “equal- weight” from “underweight,” adding Bank of China Ltd., Bank of Communications Co. and China Construction Bank Corp. to its portfolio, while “taking profit” in selective shares in the consumer, capital goods, auto and media industries, according to a note to clients.

European finance ministers return to Brussels yesterday a week after agreeing to a $1 trillion financial lifeline for the euro region. Ministers are under pressure to show they can reduce deficits fast enough to satisfy investors and then police budgets effectively once targets are met.

“If the European financial crisis blows up, I would agree that China’s policy would ease quicker,” Wood said today.

The euro will be on par with the U.S. dollar “sooner or later” as the region’s debt crisis worsens, said Wood.

He recommended buying emerging-market equities and shares of multinationals that sell to developing nations because of their faster economic growth prospects.

--Allen Wan in Shanghai. Editors: Richard Frost, Linus Chua

To contact Bloomberg News staff for this story: Allen Wan at +86-21-6104-7041 or awan3@bloomberg.net

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