Will 2013 Be the 'Break-Out' Year for China Stocks?

Investors watch the electronic board at a stock exchange hall in Huaibei, China.
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Chinese stocks have staged a remarkable comeback in the final weeks of the year, gaining more than 12 percent in December after languishing in negative territory for most of 2012, prompting analysts to say 2013 may finally be the year Chinese markets break out of the doldrums.

The Shanghai Composite Index hit a five-month high earlier this week on Christmas day and closed 1.2 percent higher on Friday as investors bet that the worst is over for Chinese stocks.

According to Jack Bouroudjian, CEO of fund manager Bull and Bear Partners, money is waiting to return to the Chinese stock market now that the dust has settled on the once-in-a-decade leadership transition in November.

"During an election or transition of power, usually you get that type of dysfunction and disruption. It's one of the reasons people avoided China over the course of this last year," Bouroudjian told CNBC Asia's "Squawk Box" on Friday.

"Guess what? The dust has now settled. We are going to see capital go back to China," he added.

(Read more: Changing China special)

Low valuations, and several rounds of monetary easing were all supposed to bring about a long-awaited turnaround in China's languishing stock market, but for most of the year, Chinese stocks have failed to live up to their promise. China's stock market has made losses for three years from 2009 to 2011 and fell a whopping 20 percent between May and December this year.

While the Chinese market has seen a few rallies this year, they have been short-lived. For example, from late September to the middle of October the market gained about 6 percent in 4 weeks, only to reverse direction.

The Shanghai index has also treaded below the 2,000-point level several times this year.

But as the key index recovers this month on more signs that the worst could be over for the Chinese economy, analysts are becoming more optimistic that 2013 could be the year Chinese stocks rebound.

(Read More: Coming Soon: China's Growth Resurgence?)

Data on Thursday showed annual growth of China's industrial profits quickened 22.8 percent in November from October's 20.5 percent, reinforcing signs of a steady economic recovery thanks to pro-growth policies.

"Economic fundamentals are definitely improving, and that should underpin the rally," said Norman Chan, head of investment with Caliber Asset Management in Hong Kong. "We think that the rebound can continue into 2013."

Despite this month's gains, the Shanghai Composite is still the worst performer among the major indices this year, having gained about 1.5 percent. The S&P 500 is up 12.8 percent in the year to date, Japan's and Hong Kong's Hang Seng have both gained about 23 percent.

According to the charts, the Shanghai index could climb to the 2,400-2,500 range in the first half of 2013, implying an upside of about 8.5 percent to 13 percent from current levels, Chan added.

Alan Lam, analyst with Julius Baer in Hong Kong, agrees that the market is near a bottom.

"We have always said that the market would see a bottom in the fourth quarter, and I think that's what's happening," Lam said. "We think there will be short-term corrections on the way up, depending on how the economy performs, but I do think in 2013, the Shanghai Composite will be in positive territory."

Next year, most economists are expecting the Chinese economy to expand more than the 7.5 percent forecast for 2012, the slowest annual growth since 1999.

-By CNBC's Jean Chua