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Chinese stocks surge, but looming uncertainties could drag markets down again

Key Points
  • The strong gains on Monday came after a series of reassuring statements from Chinese authorities over the weekend.
  • In the medium term, Chinese stocks could be of "good value," Shane Oliver, head of investment strategy and chief economist at AMP Capital, told CNBC.
  • However, Oliver cautioned that there's too much uncertainty around trade tensions and the growth slowdown to "say they have bottomed with any confidence."
A man looks at his mobile phone in front of boards showing stock prices at a securities company. China displays rising shares in red instead of green, unlike most other countries
Greg Baker | AFP | Getty Images

Chinese stocks surged more than 4 percent on Monday, but experts warned the markets could fall again due to future uncertainty.

The strong gains on Monday came after a series of reassuring statements from Chinese authorities over the weekend, which helped Chinese stocks extend Friday's gains.

The Shanghai composite jumped by 4.09 percent while the  surged 4.9 percent. The Nasdaq-style Chinext leaped by more than 5 percent, while Hong Kong's Hang Seng index closed 2.4 percent higher.

In the medium term, Chinese stocks could be of "good value," Shane Oliver, head of investment strategy and chief economist at AMP Capital, told CNBC. However, he cautioned that there's too much uncertainty around trade tensions and the growth slowdown to "say they have bottomed with any confidence."

"We have seen a few false bottoms this year," he added.

Vasu Menon, senior investment strategist at OCBC Bank told CNBC that trade tensions may continue to cast a shadow over China and it "doesn't look like it's going to end anytime soon."

"So you see a rebound today, but does it mean that the markets have turned a corner and you know, will hit higher? I'm not sure, I don't think so," Menon said.

Some market observers, however, found the valuations to be attractive.

AMP's Oliver said that Chinese shares are "cheap and (of) good value" for investors in the next five years.

"After the recent market pullback, Chinese equities' valuations may be getting attractive, given Chinese corporates' resilient sales and earnings growth," Deutsche Bank Wealth Management said in a report on Monday. The bank added that other factors — such as the easing of tensions after the U.S. midterm elections in November — could come into play to support the market in the medium term.

There are also signs of a recovery in Chinese infrastructure investment in November, according to the report, with the country's fiscal policy stance turning more supportive of growth since July this year.

Finally, tax cuts could also play a role.

"There have been growing discussions in China whether the government should cut tax more aggressively to support growth … but tax cut would be one possible catalyst for Chinese stock markets, if they happen," said the Deutsche Bank report.

Chinese authorities pledge support

Investors had been jittery after China's GDP numbers were released on Friday, showing that economic growth missed expectations and slowed to 6.5 percent year-over-year in the third quarter.

But a series of statements expressing support for the stock market and positive economic fundamentals were issued by the heads of the People's Bank of China, the Securities Regulatory Commission and the Banking and Insurance Regulatory Commission on Friday.

On Monday, the China Securities Regulatory Commission pledged to focus on promoting the healthy development of the fund industry.

In a released speech by Chairman Liu Shiyu, the commission said those measures include encouraging more equity financing, such as private equity and venture capital to participate in mergers and acquisitions. It will also urged local government-managed funds to help companies manage risks.

The commission said it will push to improve relevant tax policies and develop public and pension funds as well.

A day earlier, the State Council, the country's cabinet, said China must balance the need for stable growth while managing risks and maintain a prudent and neutral monetary policy.

The cabinet added that Beijing will focus on resolving financing difficulties of smaller firms and the private sector, saying that loans to promising companies that face short-term difficulties should not be blindly cut off.

— CNBC's Eustance Huang and Reuters contributed to this report.