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POLL-Shanghai stocks to rebound after near-term dip

Published 03/24/2011, 10:16 AM
Updated 03/24/2011, 10:20 AM

* Shanghai to gain 11 percent in 2011 after 14 percent drop in 2010

* Nine of 16 respondents expect index to dip briefly in Q2

* Monetary tightening may ease in H2, paving way for gains

By Chen Yixin and Soo Ai Peng

SHANGHAI, March 24 (Reuters) - Shanghai shares are set to rise further this year recouping most of the losses logged in 2010, though concerns over monetary tightening could lead to a temporary dip next quarter, a Reuters poll found.

China's benchmark Shanghai Composite Index will likely close the year at around 3,125 points, up about 6 percent from Thursday's close of 2,946.71 points, according to a poll of 16 analysts conducted over the past week.

For the year as a whole, the market is expected to rise over 11 percent, reversing some of the 14.3 percent drop in 2010 that made it one of the worst performers in the world as policy uncertainty hung over investor sentiment.

It will not be a steady march upward, however.

Six of the 16 analysts polled expect the index to breach its recent lows of 2,850-2,900 points and fall to as low as around 2,625 points over the next couple of months before regaining its upward momentum, according to the poll.

"Inflation will be an issue throughout the year. Liquidity tightening measures will be more frequent in the first half," said Chen Shaodan, analyst at China Development Bank Securities in Beijing.

"Tightening measures may loosen up in the second half. The market is expected to pick up gradually," said Chen, who predicts the benchmark index will gain 14 percent in total during 2011.

The central bank has raised interest rates and required reserves multiple times in the last several months to try to contain consumer inflation, which reached 4.9 percent in February.

Still, the Shanghai market has outperformed so far this year, as concerns over the impact of the efforts to combat inflation have eased somewhat.

The index has gained 5 percent so far this year, compared with around a 2 percent fall in MSCI's index of Asia-Pacific shares outside Japan.

UNDEMANDING VALUATIONS

Chinese lenders, whose shares have been hit by the recent tightening steps, could support the market recovery, even though many analysts expect further rises in interest rates and required reserves.

Some lenders including Bank of China have said they may cut their dividends in order to help preserve their capital as they scramble to meet tougher capital requirements.

Despite those prospects, shares of Chinese banks -- which take up a significant weighting in the Shanghai index -- have performed relatively well this year as banks are considered a bargain now, with the sector trading at attractive valuations, analysts said.

The Shanghai-listed shares of Industrial & Commercial Bank of China, the world's biggest bank by market valuation, have risen 4 percent so far this year.

No.2 lender China Construction Bank, which is also the largest mortgage lender in the country, saw its Shanghai-listed shares up 9 percent so far this year.

Any such upside for the financial sector could contribute to better sentiment overall, especially if the impact of concerns over policy tightening start to fade.

"In the short term, there's not much room on the upside due to liquidity constraints, as well as uncertainty from Japan's nuclear crisis," said Li Feng, a trader with Fortune Securities.

"But there's not much room for blue-chip stocks to fall either, as they are already quite cheap," Li added. (Additional reporting by Samuel Shen and David Lin, additional polling by Bangalore Polling Unit; Editing by Jon Loades-Carter)

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