U.S. Investors ‘In No Hurry’ to Buy China Stocks, Citigroup Says

Chinese Securities Regulatory Commission Chairman Guo Shuqing
Guo Shuqing, chairman of the China Securities Regulatory Commission (CSRC). Photographer: Nelson Ching/Bloomberg

U.S. investors are “in no hurry” to buy China’s stocks on concern earnings will slump further as the economy slows and policy makers refrain from adding stimulus measures, according to Citigroup Inc.

Only about 25 percent of the investors that Citigroup officials met during a U.S. trip may consider purchasing equities, “though with low levels of convictions,” according to a report dated yesterday. There’s concern the economy or earnings may get worse before they get better, the report said.

“The majority of investors seemingly are sidelined and are in no hurry to participate, even if it means missing an initial 10 percent run,” said Shen Minggao, a Hong Kong-based analyst at Citigroup, who met with about 60 equity investors in the U.S. in the past two weeks. Investors are concerned “Chinese equity is not as cheap as the numbers have suggested or there is no clear sign that the de-rating is near its end.”

The Chinese government is seeking increased foreign investment in the nation’s equities after the benchmark Shanghai Composite Index briefly dropped below the 2,000 level on Sept. 26 to a three-year low. The Shanghai Stock Exchange last month completed a 10-day road show in North America after visiting more than 30 institutional investors in the U.S. and Canada.

The Shanghai index rose 1.8 percent to 2,111.77 at 11:01 a.m. on speculation shares are undervalued. The index trades at 11.3 times the earnings of China’s biggest companies, the lowest level since at least 1997. It has tumbled 34 percent from its November 2010 high through yesterday, the most among benchmark gauges in 21 developing nations tracked by Bloomberg.

At least 41 overseas institutions gained access to mainland stocks this year as China eased capital restrictions. China Securities Regulatory Commission Chairman Guo Shuqing expanded the qualified foreign institutional investor, or QFII, program as part of a plan to restore confidence in the market.

Deepening Slowdown

Data for the past two months point to a deepening slowdown after manufacturing contracted in September, imports unexpectedly fell in August, industrial output expanded at its weakest pace since May 2009 and industrial companies’ profits dropped for a fifth month. Policy makers cut their expansion target to 7.5 percent from the 8 percent goal in place since 2005, Premier Wen Jiabao said on March 5. The International Monetary Fund lowered China’s growth estimate by 0.2 percentage point to 7.8 percent in 2012 and to 8.2 percent in 2013.

Policy Disappointment

Investors are hesitant to take a longer-term view on China’s shares because of “policy disappointments,” according to Citigroup. The central bank has refrained from easing since rate cuts in June and July and a May reduction in reserve requirements for lenders. The government has been reluctant to lower rates further amid concern inflation will quicken and more liquidity will re-flate the property bubble.

Some investors were “closely monitoring” growth indicators, including accelerated infrastructure investment growth and additional funding to support projects, in the near term to gauge the timing of an economic recovery. The Economic Information Daily reported today the country is planning to invest 2.3 trillion yuan ($370 billion) in railroad infrastructure through 2015.

Delegates from the Communist Party will gather in Beijing starting Nov. 8, when they are forecast to anoint Vice President Xi Jinping, 59, and Vice Premier Li Keqiang, 57, as the so-called fifth generation in charge, to replace President Hu Jintao and Premier Wen. This announcement “provided comfort” to investors, as it signals policy visibility should improve gradually, Citigroup said.

The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, has rebounded 2.3 percent this year. It plunged 17 percent last year after short sellers said Chinese companies including Sino-Forest Corp. were misleading investors.

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