Halbis sees Chinese equity correction as opportunity in Year of the Rat

The Chinese equity market is returning to attractive levels as we approach the Year of the Rat (7 February), according to Richard Wong of Halbis, the active management specialist of the HSBC Group.

Following the sharp correction in late 2007 led by concerns over the US outlook and rising inflation in China - the 2008 price to earnings ratio of Chinese shares has returned to more attractive levels, and earnings growth remains strong. Hong Kong listed H and red chip stocks are now trading on a forward price to earnings ratio of 15 times, while 30% earnings growth is expected during 2008.

Wong, who is manager of the US$5.8 billion HSBC GIF Chinese Equity fund, expects that while there will be uncertainty in the short term, Chinese H and red chip shares could resume their upward climb in the second quarter of 2008 when there is better clarity over both the US outlook and whether rising inflation can be curbed.

In terms of inflation, the Chinese Consumer Price Index (CPI) rose to an eleven year high of 6.5% in December 2007 on the back of higher food prices. Excluding food, CPI was still mild at 1.5% in 2007.

Wong says: We believe the Chinese Government may increase interest rates to help reduce inflation ahead of the National Peoples Congress (NPC) meeting in March 2008. However, any interest rises would not have a substantial negative impact on Chinese equities.

Other positive factors that should support the Chinese equities include a cut in corporate tax from 33% to 25%, starting in January 2008, which will help to increase corporate profitability.

Wong believes shares couldalso benefit from increased allocation to China due to increasing market capitalisation resulting from more IPOs and market movement. (IPOs in 2007 were estimated at US$30 billion, with another US$20 billion expected for 2008).

Furthermore, the trend of industrial consolidation with mergers and acquisition opportunities maycontinue to unlock company value and improve pricing power, he adds.

Chinese equities should continue to be further supported by robust economic growth, which shows no sign of abating. GDP growth over 2007 was 11.4% and is projected to grow by 10.2% in 2008 (according to Chinese Academy of Sciences.)

Wong says economic growth may moderately slow, but he does not expect it will grind to a halt. In 2007, domestic retail sales increased by 16.8% on the previous year. Meanwhile, fixed asset investment was up by 24.8% over the same 12-month period.

Halbis says that while growth in China would likely slow in the event of a global recession, this would not sound the death knell for the booming market.

Wong says: We believe a US recession may marginally slowdown Chinas export growth, but the impact would most likely not be too severe. This is because China has emerged as a global economic powerhouse in its own right. Over recent years, China has increasingly broadened its export base and reduced its dependence on the US, which accounted for about 19% of Chinas total exports in 2007.

Chinas exports to Europe have already exceeded that of the US. With a strong domestic market, increasing exports to other Asian countries, Africa, Latin America and the Middle East, Chinas export trade should be quite resilient to any slowdown.