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Chinese Stocks to Drop, Growth to Slow Dramatically: Strategist

CNBC.com
Thursday, 5 May 2011 | 6:51 PM ET

Fears of further monetary tightening in China have been weighing on the country's stock market over the last two weeks with the Shanghai Composite dropping 6 percent during that time. One expert believes investors are in for a nasty surprise over the next 12 months and that Chinese equities will remain under pressure.

Is China's Economy Headed for a Hard Landing?
Diana Choyleva, director at Lombard Street Research and Ian Harnett, co-founder & managing director at Absolute Strategy Research debate on the health of the Chinese economy.

"Authorities (in China) have been woefully behind the curve in tightening monetary policy," Diana Choyleva, Director of Lombard Street Research told CNBC.

She said China's central bank was likely to continue to tighten policy into the second half of the year to tamerising prices. As a result, they would have to bring growth rates down to 5 percent from 9 to 10 percent currently. She expects Chinese stocks to shed around 10 percent between now and May 2012.

"China is very likely to go into, or already is, at the worst point in the cycle where growth is slowing down and inflation accelerating," Choyleva said.

According to Choyleva, China's policymakers are playing catch up after stimulating the economy to deal with the global financial crisis. She says they have been too late in withdrawing the stimulus, resulting in a "large monetary overhang".

But, not everyone is as bearish. Ian Harnett, Co-Founder & Managing Director of Absolute Strategy Research thinks China is on the right track.

"The Chinese authorities have run some of the most effective macro-prudential policies that we've got globally at the current time," he said.

According to Harnett, low interest rates around the world would support global growth and this would bode well for emerging markets such as China.

The Chinese equity market also continues to look attractive, Harnett told CNBC. "Valuations are not demanding," he said, pointing to the Shanghai Composite's price earnings (PE) ratio of 10, compared to a PE multiple of 30 in 2007, when the index was at its peak.

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