By Jin Jing (China Daily)
Updated: 2008-01-03 10:22

Shen said a liquidity crunch is unlikely in the near term given foreign investors' increasing interest in renminbi assets, but a reversal of liquidity flows is still likely as long as the global market remains volatile.

Corporate earnings growth is expected to slow with the weak stock market performance because at least one-third of the earnings growth was a result of the booming market from revaluations of investment portfolios and capital gains, experts said.

"Headline earnings growth could easily disappoint due to the role of stock market gains in the profit numbers this year," said Jonanthan Anderson, senior economist at UBS Investment Research.

But analysts said a massive market sell-off or meltdown is unlikely.

"The stock market collapse is not expected to happen because there is no margin trading system in China," said Cao Honghui, a researcher with the Chinese Academy of Social Sciences. Unlike the US consumer, who borrows about 60 percent of what he or she spends, Chinese consumers are borrowing less than five percent.

"We could view a market correction as canceling some positive effects from the recent rally. Given the authorities' priorities to maintain social and economic stability, the scenario of a sharp market correction doesn't look likely in the short term," said Shen.

Experts said stocks in the consumer sector, such as consumer products, retail and telecom, are worth investing this year as their earnings are based on much safer and strong volume growth.

Asset-price-sensitive sectors, including banks, insurance, real estate, oil and material are more dangerous to invest in because of their exposure to tightening risks and US recession.

"Medical consumption companies and electrical appliance companies are expected to perform well because the government is expected to invest significantly in the social security and healthcare systems," said Gui Haoming, chief analyst at Shanghai Shenyin Wanguo Securities.

"Following slower year-on-year credit growth, financial institutions should also see slower profit growth in the fourth quarter as the government calls for credit tightening," said Shen.

Shen added that share prices of listed banks could be under pressure, and non-performing loans at some banks could build up if firms suffer from financial distress in the near future. Those who rely more on interest income may suffer the most.

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