China’s Stocks Still Cheap After Rally as Fiscal Steps Loom, ABN Amro Says

China’s shares are still undervalued after this year’s rally and may extend gains as easing inflation allows the government to adopt more fiscal policies to boost economic growth, said ABN Amro Bank NV’s private bank unit.

The Shanghai Composite Index (SHCOMP) has risen 9.7 percent in 2012, pushing up valuations to 10 times estimated earnings from a record low of 8.9 times on Jan. 6, according to weekly data compiled by Bloomberg. Still, that’s lower than its four-year average multiple of 16.2, data showed. The index has risen for six weeks, the longest winning streak since November 2010.

“We really like China,” Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Bank, said in a Bloomberg television interview today. China is the bank’s top pick because of a “pretty low” valuation after equities slumped last year, she said. The government has room for fiscal stimulus after inflation peaked in 2011, Roth said.

Investor interest in Chinese equities is increasing. The value of shares traded on the Shanghai stock exchange reaching the highest since Nov. 3 on Feb. 22, almost the double the daily average over the past 100 days, Bloomberg data showed, while new stock account openings jumped 19 percent to 187,748 accounts in the week ended ended Feb. 17, according to the China Securities Depository and Clearing Corp.

China’s stocks have rebounded this year on speculation the government will further cut lenders’ reserve-requirement ratios and relax property restrictions to stem a decline in economic growth triggered by two years of tight monetary policies and Europe’s debt crisis.

Easing Signals

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.

China’s stocks may fall for a third year as the central bank’s “fine-tuning” of monetary policies won’t be enough to offset an economic slowdown, David Cui, chief China strategist at Bank of America Corp.’s Merrill Lynch unit, said in an interview in its Shanghai office on Feb. 22. The Shanghai gauge tumbled a combined 33 percent in 2010 and 2011, making it the worst performer among the world’s 10 biggest markets.

The central bank announced a cut in lenders’ reserve- requirement ratios last weekend for the second time in three months, amid concern a credit crunch will curb lending to small companies. Premier Wen Jiabao said this month the government will support small companies with a 15 billion-yuan ($2.4 billion) fund. China will raise export tax rebates for some goods for the first time since 2009 this year, the China Daily reported Feb. 21, citing Vice Commerce Minister Zhong Shan.

“With the valuation, the easing policy bias, it’s my top pick country,” said Roth.

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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