Policy-Driven China Stocks Rally Less Likely, Deutsche Bank's Jun Ma Says

The likelihood that China’s stocks will rally toward the end of the year has diminished because the government is unlikely to take steps to boost the economy and accepts slowing growth, according to Deutsche Bank AG.

China’s economy will likely grow at 7 percent annually in the next 10 years, compared with 10 percent in the past decade, Deutsche Bank analysts led by Jun Ma wrote in a report. The MSCI China Index will gain 18 percent in 12 months, down from a previous forecast of 25 percent, according to the report.

“We expect the government to increase its tolerance for lower growth, which implies a lower probability of major policy stimulus in 2011,” said Ma, who is ranked first in Institutional Investor’s 2010 All-China poll. “Even if there were some policy relaxation in 2011, we think its magnitude would be very limited.”

The MSCI China, which tracks mostly Hong Kong-traded Chinese companies, has declined 1.4 percent this year, compared with a 4.3 percent gain in the emerging-markets gauge. The Shanghai Composite Index, which measures stocks traded on the larger of China’s two exchanges, declined 0.2 percent to 2,597 at 10:44 a.m. local time, extending a 21 percent drop this year amid concern government curbs on the property market and energy consumption will slow growth in the economy and earnings.

‘Bumpy’ Ride

China’s stocks will remain volatile in the coming months because of the monetary policy outlook and U.S.-China trade tensions, former Morgan Stanley economist Andy Xie said in an interview in Shanghai.

The U.S. and China will “engage in a war of words” before this year’s congressional elections, Xie said. Still, he doesn’t expect the U.S. to take any “substantial” measures against China for its currency policies.

“China’s currency isn’t undervalued given the nation’s rising inflation rate,” he said. The real inflation rate is about 6 percent to 7 percent and may rise to “double digits” over the next 12 months, Xie said. Consumer prices jumped 3.5 percent from a year earlier in August, the most in 22 months, a statistics bureau report said Sept. 11.

The Shanghai index plunged 27 percent in the first half after last year’s 80 percent surge as the government imposed tightening measures ranging from restrictions on multi house purchases to a 7.5 trillion yuan ($1.1 trillion) annual limit on new lending by banks. The measure has rebounded 10 percent from this year’s low on July 5 on signs the nation’s economic slowdown is stabilizing.

‘Bumpy’ Road

The nation’s equities face a “bumpy” time in the coming months because of possible policy changes in the property and banking industries and worsening overseas demand, Goldman Sachs Group Inc. led by Helen Zhu wrote in a report. Lombard Street Research said Sept. 13 that stocks are in for a “rough ride.”

China’s next five-year economic plan will focus less on growth rates and more on upgrading consumption and manufacturing, promoting a green economy and developing so-called second- and third-tier cities, Deutsche Bank’s Ma said. Property developers catering to these cities will significantly outperform those that focus on the first-tier metropolitan areas, according to the report.

The brokerage’s top stock picks include Evergrande Real Estate Group Co., Shandong Weigao Group Medical Polymer Co. and China Mengniu Dairy Co.

--Chua Kong Ho in Shanghai. 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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