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Stock losses are opportunities for investors, says Goldman

(China Daily/Agencies)
Updated: 2010-01-15 08:08

Chinese stock declines spurred by tighter lending restrictions may be "short-lived" and offer investors buying opportunities in the world's fastest growing economy, Goldman Sachs Group Inc said.

The CSI 300 Index, a measure of 300 stocks traded on the two mainland exchanges in Shanghai and Shenzhen, slumped 3.2 percent on Wednesday, the most in seven weeks, after the People's Bank of China unexpectedly raised the proportion of deposits that banks must set aside as reserves.

The move is "prudent" and can reduce the risks of China developing a "full-blown asset bubble", Goldman Sachs analysts Thomas Deng and Kinger Lau wrote in a report yesterday.

"The market could remain volatile in the near term due to the lingering concerns on tightening," the Goldman Sachs analysts wrote. "However, we see any further market weakness as attractive buying opportunities to gain exposure to China's intact growth story."

China is seeking to contain risks from a credit boom which saw banks extend a record 9.21 trillion yuan of loans in the first 11 months of 2009. The lending surge helped boost the CSI 300 by 97 percent last year and spurred the biggest advance in house prices in 18 months in December.

The central bank's move this week is "welcome" and will help make China's stock market more sustainable, Rong Ren, CEO of Harvest Capital Partners, said in a Bloomberg Television interview from Hong Kong yesterday. Investors are anticipating further measures from the government "very soon", Ren said.

Monetary tightening

The country's consumer-price inflation will probably accelerate to 3.5 percent this year, higher than an earlier forecast of 2.4 percent, the analysts wrote in a separate note yesterday.

The CSI 300 has dropped an average 1.1 percent in the month following previous reserve-ratio increases, Goldman Sachs said, citing data between August 2003 and June 2008.

In contrast, the index of yuan-denominated shares has gained an average 9.1 percent in the month following a rate increase, it said.

"This probably suggests that monetary tightening for the purpose of curbing inflationary pressure against a solid growth backdrop is unlikely to derail an equity market uptrend, everything else being equal," the analysts wrote.

The Goldman Sachs analysts maintained their end-2010 target of 4,300 for the CSI 300, saying that the market hasn't "fully priced in" the nation's growth prospects.

They said further declines will be limited to 2,900 for the gauge, representing a 15 percent drop from Wednesday's close. The gauge rose 1.4 percent to 3469.05 yesterday.

Hang Seng China Enterprises Index, tracking Hong Kong-traded shares of mainland companies, is unlikely to fall below 11,800, 5.5 percent lower from Wednesday. Their so-called base case target for the measure is 16,800.