Is now the best time to buy A shares?

Many economists expect China's economic growth to start to bottom out in the first quarter of this year and recover in the second quarter thanks to the government stimulus plan. Corporate earnings could also improve as a result, improving the liquidity squeeze.

Will the domestic stock market, which slumped about 70 percent from its October 2007 peak, rebound before the global economy stabilizes? Is now the best time to jump back into the stock market? Experts gave different opinions on the website of Caijing magazine.

Yes

Zhang Zhuo, strategist of China Galaxy Securities Co Ltd:

There is still a lot of room for China's economic growth to continue. Prices of stocks are fairly low. The Chinese market is a good place for investment in the middle and long term. But Short-term fluctuations may still occur.

The dividend yield ratio (an indictor of the return investors are earning on their shares) in the Chinese market is higher than the interest rate of one-year bank savings and so investment in the stock market should be profitable.

Uncertainties remain in the economic fundamentals. The downward trend of the economy is quite clear. It is still too early to conclude that the fourth quarter of last year was the bottom of the economic cycle. But December economic statistics showed signs of improvement, boosting investor confidence. The public's expectation of the economic adjustment has also improved.

The improvement in the economic statistics in December and January lending data are due to the government stimulus moves, which eased lending to push up investment. But no analysts know how long the recovery will last. If the government stimulus plan picks up private investment, the economy would certainly recover from the current downturn.

Many institutional investors and researchers are cautiously optimistic about the country's future economic growth.

Zhao Zhiqiang, chairman of Beijing Guotai Debang Investment Consulting Co Ltd:

There is no simple answer. Small-cap stocks and so-called low-price stocks or those of businesses with poor earnings record are often overvalued on China's market. They are seldom undervalued, which is different from the US market. Before May 30, 2007, when China's stock market began slumping - about 30 percent in several days - investors seemed crazy speculating on low-priced stocks or those of businesses with poor performance. It is a defect of the Chinese market.

But some blue chips are comparatively undervalued, such as banks. Blue chips and financial stocks are worth investment. Banks might achieve positive growth this year, if the current deposit and lending interest rate differentials are kept.

Investors shifting to blue chips could be a trend in the first half of this year, which would help push up the stock indices.

No

Wang Junqing, independent commentator:

Right now the domestic A-share market is not a good place to invest, although the current price levels are fairly low in terms of price-earnings ratio and price-book ratio.

A number of uncertainties may bring unexpected risks to the stock market. Domestic economic growth is unclear. The US, Europe and Japan, the three major trade partners of China, are trapped in recession, which will reduce demand for China's exports. Stable but lackluster domestic consumption growth means it may take a long time for the Chinese economy to recover.

Previously locked shares, which could bring unaffordable liquidity pressure to the market when floated, loom ominously. If the stock index rises in the middle term, holders of those shares might float them for profit, which will drain the market's liquidity.

Gao Ting, deputy general manager of the research department of China International Capital Corporation Limited:

Whether momentum in the domestic A-share market continues hinges on investor expectations of economic recovery in the second half of this year. The economy and the stock market will likely rebound in the first half of this year before weakening again in the second half of this year, counter to general market expectations.

The effect of government-initiative stimulus policies on economic recovery in the past is not apparent. In 1998-99, after Asian financial crisis, China's GDP growth rebounded for two consecutive quarters before dropping to new lows. Government policies can push up GDP growth in the short term, but China's GDP growth heavily depends on investment and export. This time there is not much room to boost investment growth and exports will not recover in the short term since global demand is dropping dramatically.

Worse is coming for the export and real estate-backed investment sectors. The government stimulus package may not be able to offset adverse impacts from the global economic downturn. The Chinese economy may have to depend on domestic demand. Consumption growth is lukewarm and economic growth in the second half of this year may fail meeting investor expectations by not rebounding to 8 or 9 percent.

Once investors' economic expectations change the stock market will dive.

(China Daily 02/16/2009 page2)