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Here's the sign of a China bottom: Goldman strategist

Two sides to China selling

Chinese stocks may not have bottomed yet, but the sign could come in one to two weeks, Timothy Moe, chief Asia-Pacific strategist at Goldman Sachs, said Thursday.

The Shanghai composite's rebound Thursday is a positive sign, but what's more encouraging is investors are starting to see some indications of market clearing.

Seller have been largely unable to offload shares because the markets have been frozen.

"That's really the key issue," Moe told CNBC's "Squawk on the Street." "With a number of stocks suspended—we've had 32 percent of the market cap being suspended—we haven't really had a clearing of price that's fully taken place and the deleveraging which has been going on hasn't yet fully purged."

"That's really what we're looking for for a sign of a market bottom."

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Rampant borrowing contributed to a 150 percent surge in Chinese stocks in the year through June, a runup that ended with a 30 percent correction. The Shanghai composite rebounded slightly Thursday, ending the session up nearly 6 percent.

At its peak Wednesday, retail margin financing reached 2.3 trillion yuan ($370.3 billion), Moe explained. Since then, margin balances outstanding have come down 36 percent to 1.6 trillion yuan as of Wednesday night.

"We think the rough equilibrium level would probably be about a trillion," he said. "That would be where the margin balance relative to free float market cap would be commensurate with the level that we've got here in the U.S."

Given the rapid rate at which that has happened, another 30 percent reduction in margin balances could happen in the next five days or within two weeks, Moe said. That should be followed by a period of range bound trading before the market gets back on track and moves on underlying fundamentals, he said.

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