(Bloomberg) -- China’s stocks are set to rebound from this month’s plunge on prospects earnings will beat estimates and policy makers will maintain bank lending, Bank of America Corp.’s Merrill Lynch unit said. The Shanghai Composite Index climbed 2.7 percent to 2,860.97 at 10:12 a.m. local time. The gauge yesterday fell 19.8 percent below the high on Aug. 4, near the 20 percent bear- market threshold, amid disappointing earnings and concern the government will seek to damp property speculation.“I don’t think this is a turning point,” David Cui, China strategist at Merrill Lynch, said in a phone interview yesterday. “My sense is that earnings will surprise on the upside and we’ll see a round of earnings upgrades. The government’s monetary policy also hasn’t changed.”
Cui’s view is shared by U.S. fund managers Uri Landesman of ING Investment Management Inc. and Sentinel Asset Management’s Kate Schapiro, who say the stock selloff won’t prompt them to cut their investments in the world’s third-largest economy. “If you were to put a gun to my head, I would say that China is a buy, not a sell,” said Landesman, who manages $2.5 billion at ING Investment in New York. “China has always been a volatile place and that hasn’t changed in the last few weeks.” Landesman said he’s considering adding to his China holdings. The stocks will rebound because they were “oversold” and valuations are reasonable, leaving a “safety margin,” analysts led by Yu Jun at Citic Securities Co., the country’s biggest listed brokerage, wrote in a report today. Equities on the CSI 300 Index have dropped to 21 times estimated earnings for 2009 from 27 times on Aug. 3.
Stimulus Rally
China’s benchmark stock index posted the biggest gains among the world’s markets from Jan. 1 to Aug. 4, more than doubling from the low in November. Shares had surged as the government unveiled a 4 trillion yuan ($585 billion) stimulus package and new loans by banks surged to a record in the first half. The gauge remains 53 percent below the all-time high on Oct. 16, 2007.The index has slumped this month, paring the year-to-date advance to 57 percent, after new lending in July tumbled to less than a quarter of June’s level, while losses at Yunnan Copper Industry Co. and Maanshan Iron & Steel Co. revived concern that earnings will deteriorate.The equities rally also faltered as the securities regulator allowed initial public offerings after a nine-month moratorium.The stocks probably face a further “correction” in the next 30 days due to regulatory risks, UBS AG strategist John Tang said in a report today, advising investors to be “less aggressive for now, more aggressive” later.
State Construction
Jonathan Garner, chief Asian and emerging market strategist at Morgan Stanley in London, told Bloomberg Television that the main catalyst for the recent plunge was the July IPO of China State Construction Engineering Corp.“It drained liquidity from secondary markets,” he said.China Everbright Securities Co. yesterday underscored the downturn, slumping by the 10 percent daily limit, a day after it had the smallest debut of any new stock in Shanghai this year. Shanghai-based Everbright rose 30 percent on Aug. 18, against an average 109 percent for the seven other companies to list shares in China since the moratorium ended last month.
“The next few days are key,” said Cui at Merrill Lynch, who favors shares of property developers, coal and non-ferrous metals producers. “We may see another leg down if the market doesn’t hold around the 2,800 level.”China’s biggest state-owned banks such as Industrial & Commercial Bank of China Ltd. are scheduled to report their half-yearly results within this fortnight.
Policy Stance
Shanghai’s index has extended its decline since Prime Minister Wen Jiabao said on Aug. 9 that the government will maintain its current macroeconomic policy stance aimed at bolstering domestic spending as the nation continues to experience fallout from the global recession.The index is trading at 30.6 times reported earnings, against 17.8 times for the MSCI Emerging Markets Index, and remains 53 percent higher than at the start of this year.“I think it’s healthy for the market to back off a bit,” said Schapiro, fund manager at San Francisco-based Sentinel, with $17 billion in assets. “Over the next 12 months or so I think we’re in a period of time where China’s growth is still going to be the fastest of the major countries of the world. Even without a pickup in their export sector, they can probably grow at around 8 or 9 percent.”
Technical Signals
The Shanghai Composite is poised to rally and global equities may follow suit, according to Richard Ross, global technical strategist at New York-based Auerbach Grayson & Co. Charts shows four levels of “support” signaling that the index may rebound: the 38.2 percent Fibonacci retracement, the 200-day exponential moving average, the trend line since mid-January and the 14-day relative strength index.
“A rebound is in the cards,” said Ross.
Stocks plunged the most in eight months on July 29 on speculation the government will curb inflows into the market. Beijing-based Caijing magazine reported that day speculation the central bank was poised to order lenders to set aside larger reserves. Market News International said Chinese equities fell that day on speculation regulators will increase a tax on stock trading.
“The Chinese market is very trend-oriented because there are many individual investors,” said Philippe Zhang, chief investment officer at AXA SPDB Investment Managers in Shanghai, which oversees about $220 million. “So it can rally very quickly and go down strongly as well.”
New Accounts
Investors opened 484,185 accounts to trade stocks last week, the slowest pace since the five days ended July 10, according to data from the nation’s clearing house. Account openings peaked this year at 700,617 in the last week of July, days before the index reached this year’s high, the data shows.“It’s scary,” retiree Xu Xuehong, 64, who had about 300,000 yuan ($43,900) invested in shares, said in an interview at a branch of Shenyin & Wanguo Securities Co. in Shanghai. “The decline is too rapid; I am not going to make new investments.”China’s CSI 300 index, measuring exchanges in Shanghai and Shenzhen, has fallen more than 20 percent five times since 2005, with the index plunging by 33 percent and lasting almost three months on average during the bear markets, according to Birinyi Associates Inc. The index fell 5 percent to 3,014.47 yesterday, down 20 percent since Aug. 4.
“The speed of this drop stands out,” said Kevin Pleines, analyst for the Westport Connecticut-based research and money management firm. “If this decline follows the average, it will take the CSI down another 486 points to 2,527.”
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