China's Stock Rally Is a Chance to Exit, Morgan Stanley Says

By Chua Kong Ho

Sept. 19 (Bloomberg) -- China's stock support measures and the ensuing rally offer an opportunity to exit the world's third-worst performing market of 2008 before an ``earnings recession'' sets in, Morgan Stanley said.

Investors should sell while shares are rising as an economic slowdown will hurt profits and ``global financial market turmoil and de-risking are still ongoing,'' Morgan's Hong Kong-based Jerry Lou and Allen Gui wrote in a note dated yesterday. China Galaxy Securities Co., the country's second- biggest brokerage by revenues, disagreed, recommending stocks of state-controlled companies.

China's CSI 300 Index surged the most in more than three years today, with more than two-thirds of the index's stocks soaring by the 10 percent daily limit. The government said it will buy more shares in the nation's three biggest banks and scrapped a tax on stock purchases, after a 64 percent slide erased $2.64 trillion of stock market value this year.


The measures are a ``defense'' and don't mark a ``bottom for recovery'' for China's stock market, the Morgan note said. ``The A-share and H-share markets are having a more fundamental problem than just poor sentiment.''

China will remove a stamp duty on stock purchases and the government-run fund Central Huijin Investment Co. will increase its stakes in the nation's biggest banks, the official Xinhua News Agency reported yesterday. The State Asset Supervisory and Administration Commission separately said it supported stock buybacks by state enterprises in their publicly traded units.

`Buy China'

Beijing-based China Galaxy, in contrast, advised investors to purchase shares of state-controlled companies with low price- to-book valuations, with a focus on financial, resources, energy and infrastructure stocks, according to a note today.

The Shanghai Composite has found its medium-term trough at the 1,802-point level and will trade between 1,800 and 2,400 points in the near future, the note said. The gauge has slumped 61 percent this year to close at 2,075.09 today.

``The measures demonstrate the government's intent to maintain market stability and shows the authorities view stocks as presenting value,'' China Galaxy's report said.

The brokerage recommended 30 companies, including PetroChina Co. and China Petroleum & Chemical Corp., the nation's two largest oil companies.

To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net