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Buy China Stocks on Policy Reversal, RCM’s Konyn Says

China’s stocks, the worst-performing major market this year, may be poised for a “significant” rally when the government relaxes its policy tightening measures, according to RCM Asia Pacific.

“Given that investors are so far underweight, it could be a significant move” when the government reverses its lending and property curbs, Mark Konyn, Chief Executive Officer of RCM Asia Pacific, which manages more than $12 billion, said in a Bloomberg Television interview. “You talk about fickleness among investors. China is the prime example, finishing last year, everyone enthusiastic, this year’s been a disaster.”

The Shanghai Composite Index gained 0.7 percent to 2,673.75 at 10:54 a.m. local time, adding to a 12 percent rebound from this year’s low on July 5 as investors speculated the government would ease monetary policy to spur economic growth. That’s trimmed this year’s loss to 19 percent, after the government increased down-payment requirements on home sales and ordered banks to set aside more deposits as reserves to curb asset bubbles. The Shanghai gauge has the third-biggest decline among 93 global equity gauges tracked by Bloomberg.

Konyn, based in Hong Kong, didn’t say when the government may ease its tightening policies. Morgan Stanley said Aug. 2 China’s policy cycle will turn growth supportive in the fourth quarter. Deutsche Bank AG economist Jun Ma and China International Capital Corp. equity strategist Hao Hong said last month inflationary pressure reduces the likelihood the government will ease monetary policy in the near term.

Economic Evidence

China’s markets may need further clarification on policy direction and evidence of economic improvement to rise, Macquarie Securities said in a report dated Sept. 3.

Manufacturing in China grew at a faster pace in August after the weakest performance since early 2009 in July, signaling that the economy’s slowdown is stabilizing. China’s economic growth may slow to 8.2 percent in the fourth quarter after growing at 11.9 percent in the first quarter and 10.3 percent in the second quarter, Citigroup Inc. said in a report.

The Chinese economy is “still very sensitive to the external sector, the sovereign debt crisis has been a big blow to the recovery in China and its working its way through those issues,” said Konyn.

The Shanghai Composite rose today on speculation the Obama administration may announce some economic-boosting measures and as U.S. jobs data were better than estimates, bolstering the outlook for Chinese exports. The U.S., the world’s biggest economy, makes up about 20 percent of China’s exports.

Konyn, who has been based in Hong Kong since 1989, was the head of institutional business development for Fidelity Investments in Hong Kong before joining RCM in 1997. He is a fellow of the Royal Statistical Society, and was previously a committee member of the FTSE Index Asia Pacific.

‘Overweight’ China

Erwin Sanft, a BNP strategist based in Hong Kong, said he remains “overweight” in Chinese equities and that the equity market is likely to rise when free cash flow is back in positive territory, which may occur in the fourth quarter, according to a note to clients.

The rebound in China’s stocks since July may resume this month as valuations have already reflected a slowdown in second-half earnings and the economy has already hit bottom, Industries Securities Co. said in a report yesterday.

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