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China Shares Rebound May Falter as Government Delays Easing, Deutsche Says

China’s equities rebound may falter as the government delays easing its tightening measures until the fourth quarter, according to Deutsche Bank AG.

A pull-back in Chinese stocks is likely after they climbed this week on speculation the government may relax its policies, and investors should wait for a “safer” entry point, said Deutsche Bank economistJun Ma, ranked first in Institutional Investor’s 2010 All-China poll.

The MSCI China Index gained 2.9 percent in the previous two sessions, trimming losses this year to 5.2 percent. The benchmark Shanghai Composite Index has fallen 23 percent this year, the worst most among Asian stock gauges, as the government introduced measures to curb mortgage lending.

“The market rebound started from Friday last week on strong expectation that policy relaxation will likely continue in the very near term, reflecting market momentum, short covering and high cash positions of many investors,” Ma wrote in a report yesterday. “This short-term uptrend is to some extent self-fulfilling and does not require much support from improvement in macro fundamentals.”

Ma expects the MSCI China Index to rise to 26 percent to 77 in the next 12 months, a forecast that he says is “relatively cautious” compared with other analysts. The index lost 0.4 percent to 61.32 at 10:28 a.m.

GDP Growth Slows

Economic growth is slowing. Gross domestic product expanded 10.3 percent in the second quarter, easing from the 11.9 percent increase in January to March period, the statistics bureau said on July 15. Reports this month also showed property prices in 70 Chinese cities fell 0.1 percent in June from May, snapping 15 months of gains while bank lending eased.

China’s economy may grow 8.6 percent in 2011, slowing from a forecast of 9.6 percent this year, according to Ma. That’s “significantly weaker” than the average growth rate of 10.3 percent in the last decade, he said.

Worsening third-quarter economic data will increase the probability of policy relaxation in the fourth quarter to 70 percent from between 50 percent and 60 percent currently, Deutsche Bank’s Ma said.

Still, any stimulus package next year will have to be “significantly less aggressive” as the policies introduced in 2009 start affecting banks’ non-performing loans and spurring a “bubble” in the property market, the economist said.

The brokerage’s forecast for a gain for the MSCI China is based on earnings growth of 17 percent for 2010 and 2011 and a forecast price-to-estimated earnings multiple of 13 times, in line with its 10-year average, according to the report.

“Investors do not have to be overly concerned by the possibility of missing a huge rally starting from right now,” Ma said. “There may well be other equally attractive entry points, on a risk-reward basis, in the remainder of this quarter.”

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

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