HONG KONG: China stocks remain "a bright spot" and are set to rise by 30 percent through 2010 as the nation's domestic demand increases, even though concerns over policy tightening will spur volatility, Goldman Sachs Group Inc said.

Banks, insurers, internet businesses, health-care services and equipment providers will benefit most from the rising spending power of the Chinese, Goldman Sachs said in a research note yesterday.

"High volatility is likely along the way, mainly stemming from a tug-of-war between robust fundamentals and lingering concerns over policy tightening in China," Thomas Deng and Kinger Lau, analysts at Goldman Sachs, wrote.

Economic growth on the mainland accelerated to 8.9 percent last quarter, the fastest pace in a year, fueled by government stimulus spending and record bank lending. That's fueling speculation that inflation concerns will prompt policy makers to tighten policy in the coming quarters.

The mainland's banking regulator said yesterday it plans to tighten rules on personal loans to prevent them from being used for speculation. Advances exceeding 300,000 yuan ($43,935) will be given directly to the borrower's counterparty, rather than the borrower, according to a draft rule.

"A property market bubble cannot be ruled out" if monetary policy remains "too accommodative for too long," Deng and Lau wrote in their report. Current property market valuations aren't "overly-stretched," they said.

Hong Kong's Hang Seng China Enterprises Index will reach 16,800, and China's CSI 300 Index will climb to 4,300 by the end of 2010, Goldman Sachs said. The forecasts are 31 percent higher than Wednesday's close of 12,831.18 for the H-share index of Hong Kong-traded mainland companies, and 29 percent above CSI 300's close of 3,329.33 Wednesday.

The mainland's stocks will rise in the first quarter of 2010 as the nation's policy makers reiterate their pro-growth bias when they convene at the Central Economic Working Conference in December, and the National People's Congress in March, the analysts wrote. Better-than-estimated fiscal 2009 and first-quarter 2010 earnings will also help drive shares higher, they said.

The H-share index may subsequently overshoot the brokerage's target and climb to 20,000 in the second quarter, whereas the CSI 300 will advance to 5,300, according to the report. The government may start raising interest rates and tighten the financial environment toward the end of the quarter as inflation pressure emerges, prompting investors to take profit, according to the research note.

Selling pressure will continue in the third quarter of 2010, Goldman Sachs said, estimating downside support levels for the H-share index at 11,800, and for the CSI 300 at 2,900, according to the research note. Valuations will then become "attractive", providing an entry point for investors, thereby stabilizing the market, the analysts said.

The equity market is set to gradually recover in the fourth quarter as liquidity remains "very bullish," leading mainland stocks to "a strong finish" in 2010, the analysts said.

Bloomberg News

(HK Edition 10/30/2009 page3)