Buy Chinese Stocks as Tightening Concerns Overstated, Morgan Stanley Says

China’s stocks are a buying opportunity as the government is unlikely to step up measures to slow the world’s third-biggest economy at a time the European crisis is deepening, according to Morgan Stanley.

The market is “pricing in a hard landing in property” and a “policy misstep” by China’s government, Jerry Lou, Morgan Stanley’s China strategist, said in a Bloomberg Television interview. “The whole market is a buy” as concerns are over- stated, he said.

Europe’s slowdown will delay the need for the U.S. to raise interest rates, reducing risks of a “double-dip” recession, Lou said. He shares the view of investors Martin Currie Ltd.’s Chris Ruffle and Templeton Asset Management Ltd.’s Mark Mobius, who are buying more of the nation’s stocks after they entered a bear market this month. Mobius yesterday called the slump in emerging-market shares a “correction” in a bull market.

China’s equities are among the world’s worst performers this year as the government reins in record lending to prevent a bubble in the country’s real estate market while Europe, its largest trading partner, grapples with sovereign debt problems. The MSCI China Index has lost 12 percent while the Shanghai Composite Index declined 21 percent.

The government has restricted banks from extending loans for purchases of multiple homes, increased mortgage rates and raised down payment requirements. The central bank ordered lenders this month to set aside more deposits as reserves for a third time this year.

Mobius Buys

Stocks on the MSCI China, which tracks mostly Hong Kong- traded Chinese companies, trade at 14.8 times reported earnings. That compares with the peak valuation of 30 times profit in October 2007. The Shanghai Composite Index is valued at 19.5 times earnings. The measure entered a bear market on May 11 after falling 20 percent from its Nov. 23 high.

“Despite the fact that a lot of people think that we are entering into a bear market, we don’t believe so,” Mobius, who oversees about $34 billion in emerging markets as Templeton Asset Management’s Singapore-based executive chairman, said in an interview yesterday in Cairo. “This is a correction in an ongoing bull market.”

China’s shipping companies will be the “most exposed” to a slowdown in Europe as the region accounts for a third of their container shipping revenue, according to Credit Suisse Group AG.

The fiscal crisis in Greece will probably make the Chinese government more concerned about local government borrowings, forcing lenders to set aside more provisions and hurting earnings, Vincent Chan and Peggy Chan, analysts at Credit Suisse, wrote in a note to clients.

Export Drop

A 20 percent drop in exports to the European Union would cut China’s gross domestic product growth by 1 percentage point, according to Credit Suisse estimates.

Chinese officials have been meeting with foreign bankers in recent days to review the country’s holdings of euro-zone debt in light of the region’s fiscal crisis, the Financial Times said without saying where it got the information.

The country’s State Administration of Foreign Exchange, which manages the reserves under China’s central bank, holds about $630 billion of euro-area bonds in its reserves and has expressed concern about its exposure to Greece, Ireland, Italy, Portugal and Spain, the newspaper said. A spokesman for the agency declined to comment to the Financial Times.

Morgan Stanley on May 25 upgraded steel and building materials shares in its China portfolio to “overweight” from “underweight,” a week after increasing the weighting of banks. Morgan Stanley maintained its end-2010 estimates of 81.7 for the MSCI China Index and 15,399 for the Hang Seng China Enterprises Index.

--Chua Kong Ho in Shanghai. With assistance from Melody Fu in Hong Kong. Editors: Allen Wan, Richard Frost

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

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