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Analysts gloomy on China's stocks

China's stock market has bounced back smartly from eight-year lows but analysts said they still see a fall of up to 40 percent before the main index finds longer-term stability.

In a rollercoaster week, the benchmark Shanghai composite index touched an eight-year closing low on June 3 before staging the biggest one-day rally in three years on Wednesday. From here on, though, it could all be downhill.

"I could easily see the market falling another 20, 30, 40 percent," market watcher Fraser Howie said, author of Privatizing China, a study of China's stock markets.

"The rally [Wednesday] only got us back to where we were three weeks ago ... Even if it goes up another 10 to 20 percent, that only gets us back to where we were at the beginning of the year," he said.

After the main index closed at 1,013.64 a week ago, the government flagged its concern about the state of the market through state media reports that it would bailout to debt-saddled brokerages.

It also said it would allow companies to buy back tradable shares to boost their stock prices and suspended its review of applications for new listings.

The China Securities Regulatory Commission also granted approval for fund management firms to invest their own capital in securities funds, according to a Shanghai Securities report.

"They're at their wits' end over the market in general -- they're getting desperate," said Howie.

"They're already throwing new incentives into the pot to try to boost the market without seeing the results of their most important reforms."

Peter So, head of China equities research at Macquarie Securities, also attributed the stock price rises in part to rumors that the government would inject new funds into the market.

But "it's just general market speculation, there's no new news there," he said.

Howie said he was not encouraged by the upturn in the market on Wednesday, which saw the Shanghai Composite Index rise 8.21 percent to 1,115.58, its largest single day gain since June 2002.

The Shanghai Composite Index recorded far higher levels at the turn of the decade, closing at a peak of 2,242.42 on June 13, 2001.

Since then, it has lost about half of its value despite robust growth in the economy as a whole.

Last year, the Shanghai and Shenzhen exchanges were Asia's worst performing markets, prompting government pledges of further reform, including changes to China's securities law.

One such reform is the trial sale of state-owned non-tradable shares in listed companies aimed at reducing state-controlled holdings that currently dominate China's markets.

The heavy state role is widely seen as politicizing corporate decision making and limiting the rights of minority shareholders.
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