Chinese Stocks May Need More Than Stimulus to Lure Investors

By Chua Kong Ho and Michael Patterson

Nov. 11 (Bloomberg) -- China may have more work ahead to revive investors' confidence in the world's worst-performing major stock market after unveiling a 4 trillion yuan ($586 billion) stimulus plan.

The government's announcement on Nov. 9 followed three interest-rate cuts in two months and the end of a tax on equity purchases. China's benchmark CSI 300 Index is still down 66 percent this year, twice the drop of the Dow Jones Industrial Average.

``What's the point of looking at the market?'' said Trudi Li, a 32-year-old Shanghai restaurant owner who lost about 80 percent of her investment in Chinese shares since August 2007. ``There had been many measures before and the market continued to fall.''

While the CSI 300 rose 7.4 percent yesterday, the most in almost two months, it has lagged behind 39 of 48 developed and emerging countries in MSCI Inc.'s indexes since global equities began rallying Oct. 28 and underperformed the 20 biggest markets this year. China needs to restore faith among individual investors, the majority owners of stocks in the country, before a rebound can take hold, RBC Capital Markets and Putnam Investments say.

A slowdown in Chinese growth may keep buyers away, said Nick Chamie, the Toronto-based global head of emerging-markets research at RBC Capital.

``You really need the retail investors to be jumping in with both feet in order to get the market hopping,'' Chamie said. ``I just don't see that materializing over the next year or so as we get increasing reports of jobs losses, factories shutting down and slower growth and export activity.''

`Gun Shy'

China's gross domestic product expanded 9 percent in the third quarter, the slowest pace in five years. Exports may cool to 18.1 percent in October from a year earlier, compared with 21.5 percent in September, according to a Bloomberg News survey of economists. China's stimulus package, worth almost a fifth of its output, is aimed at sustaining domestic demand as the credit crunch slows economic expansions around the world.

``The domestic investor is still very gun shy in China, having suffered significant drops, and amid increasing news of a deteriorating economic situation,'' said Simon Davis, London- based chief investment officer for Putnam Investments' international equities team, which oversees about $10 billion.

About 8.9 million brokerage accounts were opened this year through October in China, compared with 38 million in 2007, when the CSI 300 surged 162 percent, according to the China Securities Depository & Clearing Corp. Last year's rally pushed the index's price-to-earnings ratio as high as 53.1 in October 2007, the most expensive valuation among the biggest equity markets. The P/E ratio has since tumbled by 76 percent to 12.7.

QFII Restrictions

Individual investors accounted for 54 percent of the Chinese stock market at the end of last year, China Securities Regulatory Commission data show. Only 67 overseas institutions could invest a combined $10 billion in yuan-denominated securities under the qualified foreign institutional investor, or QFII, program as of Oct. 10.

The CSI 300, a benchmark for the so-called A-shares traded in Shanghai and Shenzhen, gained 8.9 percent in the past two weeks. The Hang Seng China Enterprises Index of Hong Kong-listed shares, including China Construction Bank Corp. and PetroChina Co., surged 49 percent during the same period.

The MSCI Emerging Markets Index added 28 percent as Brazil's Bovespa jumped 25 percent, Russia's Micex gained 44 percent and India's Bombay Stock Exchange Sensitive Index rose 24 percent.

China's 10-point plan allocates money for affordable housing, rural infrastructure, railways, power grids, social welfare to raise incomes and rebuilding after the May 12 Sichuan earthquake. China will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment. The proposal didn't detail how much would be spent on each area nor how much of the spending had already been announced.

Still Not Enough

Zheng Tuo, a money manager at Bank of Communications Schroders Fund Management Co. in Shanghai, said the government stimulus may prevent a broad decline in the Chinese market. He said he's buying financial stocks because ``valuations are pretty low.''

``The plan is what the market would like to see most -- something concrete that will do good to the economy,'' Tuo said.

It's still not enough to lure Li, who hasn't bought shares since January and may sell a Bayerische Motoren Werke AG sedan she bought with her initial stock profits last year.

``Even if it goes up, it'll take a long time before I can recoup my losses,'' she said.

To contact the reporters on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.