China’s Stock Rally to End as ‘Fine-Tuning’ Policies Disappoint, BofA Says
China Stock Rally to End as Policies Disappoint, BofA Says
Qilai Shen/Bloomberg
An investor monitors prices at a securities exchange hall in Shanghai, China.
An investor monitors prices at a securities exchange hall in Shanghai, China. Photographer: Qilai Shen/Bloomberg
Feb. 20 (Bloomberg) -- Nicole Wong, a Hong Kong-based property analyst at CLSA Asia-Pacific Markets, talks about China's real estate market and developers' stocks. China’s January home prices recorded their worst performance in at least a year, with none of the 70 cities monitored by the government posting gains as Premier Wen Jiabao reiterated his determination to maintain property curbs. Wong speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
China Stock Rally to End as Policies Disappoint, BofA Says
Qilai Shen/Bloomberg
Concerns about China’s slowdown increased after January data showed exports and imports falling for the first time in two years, new lending was the lowest for that month in five years and M2, the broad measure of money supply, grew the least in more than a decade.
Concerns about China’s slowdown increased after January data showed exports and imports falling for the first time in two years, new lending was the lowest for that month in five years and M2, the broad measure of money supply, grew the least in more than a decade. Photographer: Qilai Shen/Bloomberg
China’s stocks may fall as much as 13 percent by the end of the year as the central bank’s “fine- tuning” of monetary policies won’t be enough to offset an economic slowdown, according to Bank of America Corp. (BAC)
The government needs to cut interest rates or relax curbs in the property market to sustain this year’s 9.6 percent rebound for the Shanghai Composite Index (SHCOMP), David Cui, chief China strategist at the Merrill Lynch unit, said in an interview in its Shanghai office yesterday. Cui, 43, who has been bearish on China equities since May 2010, said the Shanghai gauge may drop to 2,100 by year-end. It rose 0.9 percent to 2,403.59 yesterday.
“If the government only does fine tuning, it’s not sufficient to remove the major overhangs behind the poor market performance over the past two years or so, including a lack of a new and sustainable growth driver and the banking system’s bad debts,” said Cui. “The markets will likely remain lukewarm.”
China’s stocks have rebounded this year on speculation the government will loosen monetary policies to stem a decline in economic growth triggered by Europe’s debt crisis and a slumping property market. The Shanghai gauge tumbled 33 percent over the past two years, making it the worst performer among the world’s 10 biggest markets. The People’s Bank of China increased interest rates and lenders’ reserve-requirement ratios last year to tame consumer prices that rose 4.5 percent last month, up from 4.1 percent in December.
“Inflation is still a threat,” Cui said. “That is one of the reasons central bank hasn’t been more forthcoming with loosening.”
‘Still a Risk’
Concerns about China’s slowdown increased after January data showed exports and imports falling for the first time in two years, new lending was the lowest for that month in five years and M2, the broad measure of money supply, grew the least in more than a decade. The expansion may be cut almost in half if Europe’s debt crisis worsens, the International Monetary Fund said in a Feb. 6 report.
Euro-area finance ministers this week approved a 130 billion-euro ($172 billion) package for Greece by tapping into European Central Bank profits and convincing investors to provide more debt relief to the country. Fitch Ratings cut Greece’s credit grade two levels to ‘C’ from ‘CCC’ after the country got approval to proceed with a bond exchange that will reduce its debt burden and avert the collapse of the economy.
Europe’s debt problems are “still a risk,” Cui said. “The ECB took away the short-term liquidity risk but didn’t solve the solvency issue.”
Premier Wen Jiabao said the nation needs to start “fine- tuning” economic policies this quarter, the official Xinhua News Agency reported Feb. 12, fueling speculation that the government will soon ease policy further to preserve growth in the world’s second-biggest economy.
Stock Forecasters
Bank of America joins China International Capital Corp. in predicting losses for China’s stocks this year. Twelve of 13 brokerages surveyed by Bloomberg forecast equities will rise this year, with Guotai Junan Securities Co., the only major firm to foresee the two-year slump, predicting a 36 percent gain. The nation’s shares haven’t posted three straight years of declines since the Shanghai Stock Exchange opened in 1990.
The Shanghai Composite rose 0.3 percent today, extending gains into a sixth week, the longest winning streak since November 2010, after the government cut reserve-requirement ratios last weekend. It was the second reduction in three months and prompted Citigroup Inc. to say the Shanghai gauge may catch up with global equity markets if the looser policies are “confirmed.”
The Shanghai gauge trades at 10 times estimated earnings, compared with 10.7 for the MSCI Emerging Markets Index. The developing nations’ index has jumped 16 percent jump this year, while the Hang Seng China Enterprises Index of Chinese companies that are publicly traded in Hong Kong rose 18 percent.
Go Defensive
“The reserve ratio cut is largely technical and we don’t really read that as loosening,” Cui said. “The stronger indicator will be M2 growth, loan growth or a cut in interest rates.”
Bank of America, ranked first for Asia research in 2011 by Institutional Investor magazine, said the central bank will reduce the reserve ratio twice more this year, while leaving interest rates unchanged after raising them three times in 2011.
Cui favors “defensive” (SHSZ300) stocks in industries such as consumer staples, utilities and telecom, while recommending investors avoid banks, property, and construction materials.
“The consensus is a soft landing but I am concerned about some growth-related risks, he said.
To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Allen Wan in Shanghai at awan3@bloomberg.net
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net
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