BNP Paribas upgrades China equities to "overweight" due to the country's macro strengths together with government's supportive policies that have shifted to domestic expenditure from exports.

"Investors shouldn't be scared to put money in China equities as they are of very cheap prices now. It's time to put money in growing companies aggressively," said Erwin Sanft, managing director and head of mainland and Hong Kong equities research. "Economy may not hit the bottom yet, but we think equities valuations are already at or close to historical troughs," he added.

"We expect H shares to outperform other large emerging markets in the next 12 months and hence upgrade China to 'overweight' rating with growing companies," Charles Huang, director of China research at BNP Paribas said.

According to the bank, China's macro strengths such as account surplus, huge foreign exchange reserves, and strong domestic liquidity together with low leverage of corporate and households suggest investors should buy China equities. Earning risk is high in China due to corporate fat trimming but solvency risk is low, the bank added.

It is expected that the central government will boost rural income, public services, agriculture and health care expenditures in the long run. Along with a shift of policies from exports to domestic expenditure by the government, the bank has adjusted its rating in various items for investment.

"We put overweight tag on telecom, consumer and counter-cycle sectors such as the Internet, health care, railway, alternative energy and agriculture but give underweight tag on financials, commodities and property due to high leverage and large earning downside risks," Sanft said.

Among those items that are underweight, Sanft suggested investors to stay away from property because there is room for developers to cut prices in the market since the flats are still over-valued.

"Affordability is one thing that concerns us. The properties in cities are still 30 percent in average higher than the market price. And developers are too stubborn to cut prices," Sanft said. "We expect developers to have massive price cuts during Chinese New Year and when sales volume starts to pick up again, we know the bottom is over. And hopefully property market will be unfreezed by then," he added.

In the near term, the bank forecasts China's growth will slow down to 8.9 percent this year and 8.4 percent next year. Earnings will slow down but there will not be any crisis on the mainland. In the next two decades, China's growth is projected at 5 to 6 percent, the bank said.

(HK Edition 11/08/2008 page2)