China’s A Share Rally Presages Economic Recovery, JPMorgan Says

By Chua Kong Ho

Feb. 12 (Bloomberg) -- This year’s rally in China’s yuan- denominated stocks is a better reflection of the country’s economic prospects than the slump in overseas-listed Chinese shares, according to JPMorgan Chase & Co.

“A-shares more accurately reflect domestic fundamentals and the liquidity situation,” JPMorgan analysts Frank Gong, Peng Chen and Lan Deng wrote in a note published today. Gong’s team was top-ranked for China research by Institutional Investor last year.

The benchmark Shanghai Composite Index has surged 24 percent this year, the world’s best performer. The Hang Seng China Enterprises Index, which tracks 43 Hong Kong-listed Chinese companies, has declined 3.7 percent in the same period, while the MSCI China Index of mostly Hong Kong-traded Chinese shares has slipped 3 percent.

China’s A-shares, limited largely to domestic investors, led the nation’s economic growth by between one to two quarters from the second half of 2005 to the fourth quarter of 2008, the note said.

The domestic stock market has become more correlated with economic performance after the government started a nationwide program in 2005 to convert mostly state-held non-tradable shares into common stock that could be traded on stock exchanges, the note said.

An increase in institutional investor ownership to almost half the total market capitalization from 30 percent in 2005 has led to a “more rational and disciplined investment approach,” the analysts wrote.

The rally in Chinese stocks should improve domestic consumer sentiment and encourage spending on big-ticket items such as cars and stimulate the property market, according to the note.

JPMorgan advised investors to buy shares of Chinese brokerages to benefit from the increase in trading volume in A shares. The Shanghai and Shenzhen stock exchanges handled a combined 32 billion transactions yesterday, the highest since Bloomberg started compiling the data on Jan. 3, 2006.

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