Goldman Sees No Rebound for Chinese Stocks

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The Chinese central bank's efforts to soothe investor fears over a liquidity squeeze in the world's second largest economy had little impact with the country's stock market falling as much as 1.7 percent on Wednesday.

Following wild swings in the benchmark Shanghai Composite index that fell as much as 5.7 percent during the trading session on Tuesday, the People's Bank of China (PBOC) sought to reassure investors saying it has provided cash to some financial institutions facing temporary shortages and would maintain stability in the money market.

This was the PBOC's first significant announcement addressing volatility in inter-bank lending rates that began in mid-June. The central bank has largely taken a backseat amid the cash crunch advising banks to instead control lending.

Goldman Sachs strategists say while the central bank has somewhat alleviated the liquidity situation in the short run, this is unlikely to drive a turnaround in the slumping stock market.

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"We see few near-term positive catalysts to drive a sustainable or meaningful rebound. Tight liquidity conditions may continue for some time, unfavorable funds flow from rising U.S. rates, and investors may hesitate to buy aggressively, given economic uncertainties," they wrote in a report late Tuesday, forecasting range bound trading in the market going forward.

China's 7-day interbank lending rate - a key indicator of market liquidity - eased to 7.2 percent from the 7.5 percent close a day earlier. However, it remains well above the one-year average of around 3 percent.

Lack of clarity over the government's reform agenda may also be a deterrent for investors, Goldman strategists added.

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"The new leadership's reform conviction is becoming more clear, but investors remain skeptical over the medium to longer-term plans, which may only be clarified at the Third Plenary Session in October," they said.

China's new leaders have pledged to reform capital markets, the currency and fight corruption as the economy shifts from an investment-led to a more consumption driven growth model.

The Shanghai Composite is the worst performing market in the region, down 15 percent year-to-date, and currently trading at its lowest levels since 2009. Concerns over a shaky economic recovery and financial instability have weighed on stocks in the recent months.

(Read More: Even the Resilient Yuan Is Feeling China's Pain)

Goldman, however, believes that going forward Chinese equities could limit further downside given record low valuations which could attract some investors.

Countering this argument, Peter Elston, head of Asia Pacific strategy at Aberdeen Asset Management who recommends staying clear of Chinese equities said, "You could argue valuations are looking quite reasonable at over 1 times book value, but I know my boss would say he wouldn't even pay 1 times book for most companies in China."

"It's very hard to know anything about what's going on either within the economy or within the banks themselves, they are very opaque in terms of where they lend. How can you feel like investing in China or suggest that you know what's going on?"

By CNBC's Ansuya Harjani