BofA says China stocks have 'corrected enough'

SINGAPORE - China's stocks have "corrected enough" and investors should consider buying equities as the probability of a hard landing for the economy is "not that high", according to BofA Merrill Lynch Global Research.

The Chinese government may also be reluctant to tighten monetary policy further on concern the European debt crisis may spread, BofA strategists led by David Cui wrote in a report.

The nation's equities are Asia's worst performers this year on the prospect China will step up measures to contain inflation and tame asset bubbles. The Shanghai Composite Index lost 6.4 percent last week, its fifth weekly drop. The gauge has slid 18 percent this year while the Hang Seng China Enterprises Index, tracking H shares in Hong Kong, has retreated 11 percent.

"The weakness in recent days caught us a little by surprise," the strategists wrote. "The question for us is whether a hard landing is indeed on the cards. At this stage, although we cannot rule out the possibility, we consider the probability not that high."

Howard Wang, head of the China team at JF Asset Management, said on May 7 Europe's debt crisis may force China to reverse its policies. Macquarie Securities Ltd also predicted that China is likely to reverse policies cracking down on the property market because they will put the nation's 8 percent economic growth target for this year at risk, according to economist Paul Cavey.

European loan

European policymakers on Monday unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases in a bid to stop a sovereign-debt crisis that has threatened to shatter confidence in the euro.

Governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators after the currency declined to a 14-month low and bond yields in Portugal and Spain soared.

BofA doesn't expect a "collapse" in China's property market given the amount of savings, income growth, expectations for inflation and a possible easing in tightening should the market weaken "too much", according to the report. "Broad" monetary policy remains accommodative even as the government cracks down on property, the strategists said.

The People's Bank of China has ordered lenders to set aside more deposits as reserves three times in 2010. The government also imposed a ban last month on loans for third-home purchases and raised mortgage rates and down-payment requirements for second home purchases to curb housing prices.

Stocks to buy

Shougang Concord Technology Holdings Ltd, Zijin Mining Group Co and Industrial & Commercial Bank of China Ltd (ICBC) are among stocks rated "buy" by BofA analysts and that are trading at near or below their 200-day lows, according to the report.

Shougang Concord, a maker of electronics components and electrical and telecommunications equipment, has lost 14 percent in Hong Kong trading this year. Zijin, China's largest producer of gold, has dropped 19 percent while ICBC, China's largest lender, has retreated 14 percent.

Bloomberg News

(China Daily 05/11/2010 page17)