China stocks to power ahead? Experts think so

Chinese shares stand out among EMs: Pro
Chinese shares stand out among EMs: Pro

Profit-taking saw Chinese equities snap a ten-day winning streak on Wednesday, but analysts say it's just a small hiccup in what could be another stellar year for mainland stocks.

The benchmark Shanghai Composite closed down 0.8 percent on Wednesday after ten straight sessions of gains. Year-to-date, the benchmark index is up 12 percent, adding to last year's over 50 percent rise.

"China must be one of the most speculative markets in the region now, so I wouldn't read too much into it. It could be spiraling up one day and spiraling down the next," said Hugh Young, MD & global head of equities at Aberdeen Asset Management.

Easing-driven rally

The upswing in mainland stocks has been premised on speculation that the People's Bank of China (PBoC) will roll out additional easing to ensure that the government achieves its 2015 economic growth target of "around 7 percent".

The PBoC's first step came in November when it reduced the one-year benchmark lending rate by 40 basis points and the one-year benchmark deposit rate by 25 basis points. On February 28, it followed up with a 25-basis-point cut in the benchmark interest rate.

Analysts expect additional easing in the form of interest rate or reserve requirement ratio (RRR) cuts after Premier Li Keqiang said the government still has room to maneuver its policy. Li's comment, made in the closing session of the annual National People's Congress (NPC) in early March, indicated that authorities may do more to prop up China's stumbling economy.

More upside ahead

Amid expectations for additional stimulus China's stock market is likely to pop further, analysts say.

"We think the A-share market is repeating the 2005-07 bull market due to policymakers' support, monetary easing cycle and with stocks trading cheap to history," Jonathan Garner, MD & chief Asia and emerging market equity strategist at Morgan Stanley, wrote in a note.

A bull statue symbolizing the stock market stands on the bund in Shanghai, China.
Keren Su | China Span | Getty Images

Chinese investors are also adding equities to their portfolios as returns from the once-hot property market diminish, boosting upside momentum, Morgan Stanley's Garner added.

According to Reuters, over 1.1 million new stock accounts were opened last week in China, up 58 percent from the previous week, and the highest increase on-week since October 2007.

Rebalancing the economy

Some analysts are taking a long-term bet on China's economic re-balancing.

"Slower growth may be more profitable for investors [because] it is associated with the rebalancing to domestic consumers, along with the government stepping back from interfering with the economy. So it may be a concern now, but it will be a good news," Kevin Gardiner, global investment strategist at Rothschild Wealth Management, told CNBC Asia's "Squawk Box" on Wednesday.

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"I'm sure the PBoC will help with something like a RRR cut, but look away from the near term, it's the long term structural advantages that are attractive," he added.

Cause for concern?

To be sure, there are analysts who are unnerved by the persisting cooldown of the world's second-largest economy.

"Premier Li came out with some commentary that placed a 'put' in the market as it suggested officials will be willing to support growth if it falls short. While this is the case, I feel there are deeper concerns for the economy as activity is shrinking, company profits are retreating and asset prices like property are subdued," Stan Shamu, IG's market strategist, said. "For the moment though, it seems that investors feel faltering growth will be supported and this could keep equities bid."