Goldman Sachs Ends ‘Long’ China Strategy After Gains

By Reinie Booysen

April 15 (Bloomberg) -- Goldman Sachs Group Inc. ended its recommendation to be “long” on China’s A shares as the benchmark Shanghai Composite Index is nearing the target set when the bank initiated the strategy in December.

The shares, mainly restricted to domestic investors, have gained 22 percent since then because of the combination of “aggressive” government stimulus measures and “sequential improvement” in the nation’s economic data, Goldman Sachs analysts including Jim O’Neill said in a note to customers today.

“We are now close to our 2,600 target and while it is easily possible that the market could go higher, perhaps significantly, we think the risk-reward is now lower than it was,” Goldman Sachs said in a note to customers today.

The Shanghai Composite’s 39 percent gain this year makes it the second-best performer after Peru among the 88 primary stock gauges tracked by Bloomberg globally. Stocks have rallied on optimism the government’s 4 trillion yuan ($585 billion) stimulus package and record new lending will spur a recovery in the world’s third-largest economy amid the global recession. Interest rates were cut five times from September to December.

The Shanghai Composite rose for a fifth day today, the longest-winning streak in three weeks, to 2,536.06 at the close. Goldman Sachs advised buying the shares in December when the index was at 2,079 and told investors to hold them until the measure reaches 2,600.

‘Further Strength’

“Our decision should not be interpreted either as a sign of concern about the Chinese growth outlook or the general picture for risk or cyclical assets,” Goldman Sachs said. “We think further strength in China’s economic news is likely.”

China’s economy probably expanded 6.3 percent from a year earlier in the first quarter, the slowest pace in almost 10 years, according to the median estimate of 12 economists surveyed by Bloomberg News. The statistics bureau is due to release the figure tomorrow.

Foreign direct investment dropped 9.5 percent from a month earlier to $8.4 billion in March, the sixth straight monthly decline, the commerce ministry said at a briefing in Beijing today. For the first quarter, spending fell 20.6 percent.

A “long” position means buying a security before selling because of an expected price increase.

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