By Chua Kong Ho
Feb. 18 (Bloomberg) -- China’s yuan-denominated shares have soared higher than warranted by earnings prospects, aided by increased bank lending, HSBC Holdings Plc and CLSA Asia-Pacific Markets said.
The Shanghai Composite Index yesterday closed above the year-end target, making Chinese shares listed in Hong Kong a safer bet, HSBC strategist Steven Sun said in a note dated yesterday. The CSI 300 Index is “expensive” at 19 times 2009 earnings after a “stellar rally,” CLSA analyst Manop Sangiambut wrote yesterday, adding “we doubt the sustainability.”
While mainland stocks may have “further room to run” before the National People’s Congress next month as the government adds stimulus programs, the rally may falter as “we do not believe it is supported by fundamentals,” Sun wrote.
The Shanghai benchmark is the best performer among 90 global stock gauges this year. Record growth in bank lending in January and a rebound in a manufacturing index fueled speculation the government’s 4 trillion yuan ($585 billion) stimulus plan is working.
The A-share market has been mainly driven by improved liquidity “as witnessed by a surge in loan growth, reportedly high cash level among mutual funds in the fourth quarter of 2008, and industry specific stimulus plans,” CLSA’s Sangiambut said. While the rally may continue “for some time,” aided by liquidity conditions and stimulus news, earnings reports from companies “are bound for disappointments,” Sangiambut said.
Shanghai, Hong Kong
The Shanghai Composite Index today fell for a second day from the five-month high of 2,389.39 on Feb. 16, above HSBC’s 2,300 year-end target. The Hang Seng China Enterprises Index, in contrast, is 20 percent short of its 9,000 estimate for end-2009, HSBC’s report showed. The gauge of so-called H shares of Chinese companies traded in Hong Kong has declined 8.9 percent this year and is valued at 9.1 times reported earnings, less than half the 18.3 times for the Shanghai index.
H shares have “priced in a much deeper economic slowdown and profit deterioration outlook,” and have a “higher safety margin for error” than yuan-denominated mainland shares, HSBC’s Sun said.
In China, M1, which includes notes, coins and demand deposits, rose 6.7 percent in January from a year ago, compared to the 18.8 percent increase in M2, the broadest measure of money supply. Banks extended 1.62 trillion yuan of new local-currency loans in January, twice the record set a year earlier.
‘Worrisome’
It is a “worrisome development that exceptional loan growth has yet to drive up M1 growth, which is a better indicator of aggregate demand, pricing power, corporate profits and therefore market performance,” Sun said.
As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said yesterday, citing money supply figures.
To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net
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