Chinese market has further to fall

Strong economic data from China gave investors on the volatile Shanghai stock market a reprieve yesterday but analysts say the Shanghai Composite Index is still in the grip of a serious bubble.

The Shanghai index was the world's worst performer last month and may fall another 25 per cent as China's economic recovery isn't sustainable, former Morgan Stanley Asian economist Andy Xie says.

The measure plunged 6.7 per cent to 2667.75 on Monday, the most since June last year, and entered a bear market on concern that a slower lending growth may derail a rebound in the world's third-largest economy.

Xie said the index should be 2000 or less.

"The market is in deep bubble territory," said Xie, who correctly predicted in April 2007 that China's equities would tumble.

News that China's manufacturing growth picked up last month, expanding at its fastest rate this year amid huge stimulus spending, helped buoy the bear market.

The Shanghai index was up 16 points last night to 2683.7.

The state-sanctioned China Federation of Logistics and Purchasing said its purchasing managers' index rose to 54 from July's 53.3 on a 100-point scale where numbers above 50 show activity expanding. It marked the sixth month of expansion.

But the Shanghai index slumped 22 per cent last month, the biggest decline among 89 benchmark indexes tracked by Bloomberg, as banks reined in lending to avert asset bubbles and policy-makers advised industries such as steel and cement to curb overcapacity.

The decline has stopped a rally that had sent the measure up 103 per cent from a November low on prospects the Government's 4 trillion yuan stimulus programme and a record amount of new credit would ensure the economy grows at least 8 per cent this year.

"The local market bears are convinced that tightening is already under way," said Howard Wang, head of the Greater China team at JF Asset Management, which oversees US$50 billion. Only a very strong set of macro numbers in August or stronger statements from central authorities would change this trend, Wang said.

Still, Chinese stocks are trading at the steepest discount in the world compared with analysts' price targets after the month-long slump. The gap of 13 per cent below analysts' combined price targets is the largest among the world's 10 largest markets, data compiled by Bloomberg shows.

Equities in China remain a bright spot among global stocks because of the nation's strong growth potential, Goldman Sachs said.

"We think the market concerns about a near-term 'exit strategy' appear premature as the Government remains pro-growth," Thomas Deng and Kinger Lau, analysts at Goldman Sachs, wrote in a research note.

Goldman Sachs has boosted its growth forecasts for China's economy to 9.4 per cent this year from an earlier estimate of 8.3 per cent, it said.

Gross domestic product may increase 11.9 per cent next year, higher than an earlier estimate of 10.9 per cent.

- BLOOMBERG