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CICC Turns More Positive on China Stocks, UBS Sees 30% Gain

December 01, 2011

(Adds Citigroup target in ninth paragraph.)

Dec. 1 (Bloomberg) -- China International Capital Corp. turned more positive on Chinese stocks after the central bank cut lenders’ reserve-requirement ratio, while UBS AG sees a gain of up to 30 percent for the benchmark index next year.

The People’s Bank of China’s “pre-emptive” decision to lower the amount banks need to set aside as reserves will benefit financial companies and material producers the most, Hao Hong, global equity strategist of CICC, China’s biggest investment bank. The Shanghai Composite Index has “upside potential” in 2012 as liquidity is expected to improve and the cost of capital may decrease, UBS said in a report today.

“The PBoC appears to be preemptive this time around,” Hong said in a note to clients. “As such, its move is likely to render some support to the market in the near term.”

The central bank announced yesterday after the market close it will cut the reserve ratio by half a percentage point, the first reduction since 2008 after six increases this year to curb credit growth and tame inflation. The Shanghai Composite Index rose 2.3 percent to 2,386.86 at the close, after dropping 3.3 percent yesterday amid concern economic growth in China is cooling and Europe’s sovereign debt crisis is deteriorating. The Hang Seng China Enterprises Index of Chinese stocks listed in Hong Kong rallied 8.2 percent, the most since December 2008.

The Shanghai gauge has fallen 15 percent this year, after sliding 14 percent in 2010, after the central bank raised interest rates three times to curb inflation that reached a three-year high of 6.5 percent in July. The gauge is valued at 11.3 times estimated earnings, compared with a four-year average of 17.3 times, according to weekly data compiled by Bloomberg.

‘Modest Recovery’

“We expect a modest recovery in the A-share market,” Li Chen, UBS’s Shanghai-based head of China equity strategy, said in a report. While the stock market’s price-earnings ratio will increase, corporate profit growth may continue to decline for the next two-to-three quarters, Chen said. UBS has a positive 12-month outlook on H-shares as current valuations seem defensive, strategist John Tang wrote.

The central bank made the decision to lower the reserve ratio amid signs that inflation is slowing, manufacturing data will be “disappointing” and the European debt crisis has worsened, said Hong of CICC, the top-ranked provider of China research in Asiamoney’s survey.

“For this rebound to evolve into a sustainable rally, we need to see some concrete steps to resolve the sovereign crisis, and stem the possibility of a global economic relapse,’ he said.

Slowing Inflation

Citigroup Inc. forecast Chinese stocks to be "range-bound" for most of 2012, with A shares to trade from 2,400 to 2,800 and reaching as high as 3,200. H shares may trade between 10,700 and 12,000 next year and reach a high of 14,000, according to a report today by Minggao Shen, an analyst at Citigroup.

A report today showed China’s manufacturing contracted for the first time since February 2009. The Purchasing Managers’ Index fell to 49.0 in November from 50.4 in October, the China Federation of Logistics and Purchasing said in a statement. The median estimate in a Bloomberg News survey of 18 economists was 49.8. A level above 50 indicates expansion.

Growth in China’s economy, the world’s second-largest, will slow to 8.5 percent next year, the Paris-based Organization for Economic Cooperation and Development said, down from its May forecast of 9.2 percent. The economy expanded 9.1 percent in the third quarter from a year earlier, the least in two years. UBS this week lowered its prediction for growth in 2012 to 8 percent from its previous call of 8.3 percent, and Citigroup Inc. cut its forecast to 8.4 percent from 8.7 percent.

China’s inflation rate may have fallen to 4.3 percent in November from 5.5 percent the previous month, CICC’s Hong said. The November data are due on Dec. 9. The government’s full-year target is 4 percent.

Chinese New Year

Reserve ratios will decline by 50 basis points effective Dec. 5, the People’s Bank of China said on its website yesterday. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG, while the official Xinhua News Agency reported it may add about 400 billion yuan of liquidity, without saying which economists it was citing.

‘‘The impact of the reserve ratio cut is definitely going to be positive, at least for the next few days,” said John Wong, a Hong Kong-based portfolio manager at Oberweis Asset Management Inc. “The timing could not have been better because the Chinese would like to improve liquidity before the Chinese New Year holiday in January.”

Smaller banks, brokerages, property developers, insurance companies and material producers are expected to benefit the most, CICC’s Hong said.

Central Banks Cuts

China Merchants Bank Co. and Huaxia Bank Co. rose more than 3 percent in Shanghai, leading gains for smaller lenders, while China Vanke Co., the nation’s biggest developer, surged more than 4 percent, and Jiangxi Copper Co. jumped the most in nine months.

“The move suggests that the government is in position to fight against a hard landing and maintain growth,” said Sandra Cai, an analyst at Samsung Securities, in a report today. “To some extent, this lowers near-term asset-quality risks at banks.”

Two hours after China’s policy move, the U.S. Federal Reserve, the European Central Bank and the monetary authorities of the U.K., Canada, Japan and Switzerland said they were cutting the cost of emergency dollar funding to ease strains in financial markets.

‘Shift in Focus’

China’s reduction in reserve requirements for bank signals a “shift in focus” from anti-inflation to economic growth stability, Citigroup Inc. said.

“The government appeared increasingly concerned about the downside risks, and the RRR cut can represent a start of policy easing,” Citigroup analysts led by Shuang Ding said in a report dated yesterday. The central bank may also take more measures to achieve targeted money growth, which is below the official target of 16 percent, they wrote.

A “couple” more cuts in reserve requirements are “possible” before the Chinese New Year in late January, with yesterday’s move representing government “readiness” to act to avoid a sharp downturn, they wrote.

--Weiyi Lim, with assistance from Richard Frost in Hong Kong and Belinda Cao in New York. Editors: Allen Wan, Richard Frost

To contact Bloomberg News staff for this story: Weiyi Lim in Singapore at

To contact the editor responsible for this story: Darren Boey at

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