Goldman: Still bullish on China, despite slashing target

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Market turmoil in China earlier this year sent shares around the globe into a tizzy, but Goldman Sachs is staying bullish, despite slashing its index target.

Goldman cut its CSI 300 target to 4,000 from 5,000, but it noted that's still more than 20 percent upside from current levels. The index, which tracks 300 stocks listed in Shanghai and Shenzhen, tacked on 3.2 percent to 3,305.79 in intraday trade Thursday; China's markets were closed from October 1-7 for the weeklong National Day holiday.

"A lower target mainly reflects a more moderate, yet more sustainable, market liquidity profile, and higher risk premium given the still-recovering investor confidence," Goldman said in a note Thursday. "The ups and downs in the market haven't changed our strategic narrative for A-shares," Goldman said; A-shares are -denominated stocks traded in China.

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A nearly 40 percent selloff in mainland stock markets over the past few months exacerbated concerns over the mainland economy, especially after China's regulators took a series of dramatic measures to boost the stock market, including large-scale share purchases, that had the unintended effect of denting confidence in the government and spurring criticism that the incident was badly mishandled.

Reforms in China's regime for managing its currency in August resulted in an effective devaluation of the yuan against the U.S. dollar, spurring both speculation of a currency war and concerns over how the government is managing an economic transition toward a more market-oriented system.

Despite the turmoil, Goldman expects some of China's reforms to remain on track.

"The recent selloff may hinder the pace of financial market reform but other structural reforms are still progressing, although we think the burden of proof is on China given the recent policy surprises," Goldman said. "The implementation of state-owned enterprise (SOE) and fiscal reforms, and the upcoming 13th Five Year Plan, the first by the current administration, are the key issues to watch."

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Goldman sees the SOE reforms as particularly important to the market outlook as those companies are economically important, contributing around 40 percent of China's gross domestic product last year, employing around 10 percent of the workforce and accounting for around 70 percent of A-share market capitalization.

The investment bank isn't the only one still playing the China theme.

Deutsche Bank reiterated its positive view on H-shares -- or shares of Chinese companies listed in Hong Kong -- pointing to government steps to boost consumption, including lower mortgage downpayments and tax breaks on auto sales.

"We continue to see sizable upside," Deutsche Bank said in a note Wednesday, calling the HSCEI index would reach 13,000 by the end of this year. The index was down 1.7 percent at 10,217089 intraday Thursday.