For staunch believers, weakness in China shares is a temporary blip

China A-shares were the worst performing equities worldwide in August, due largely to concerns that a sharp fall in bank lending could dry up liquidity in the coming months. Some pundits are using the steep decline in the China A-share market to dig up previous concerns that the Rmb4 trillion ($588 billion) fiscal stimulus package may not be enough to support the mainland's economic recovery. And there are those who question the sustainability of China's long-term economic growth.

All those concerns have not weakened the resolve of China's staunch believers, however.

China's sharp correction in August came as interim results from 1,631 A-share companies showed a "broad sequential improvement in performance" during the second quarter, according to Jing Ulrich, managing director and chairman for China equities and commodities at JP Morgan.

The aggregate profits of firms listed in Shanghai and Shenzhen declined by 14.6% to Rmb484.8 billion ($71.3 billion) in the second quarter of 2009 from a year ago, compared to a 25.8% year-on-year drop in the first quarter. Compared with the first quarter, combined profits were up 36.3%.

Ulrich notes that following the sharp correction in A-shares, the A-share to H-share premium has narrowed to 16%, the lowest level since January 5 this year.

Although the closely watched CSI 300 Index was up 0.50% at 2,843.7 points yesterday, it is still down a steep 25% from its recent peak of 3,787 on August 3. The index is cap-weighted and tracks the 300 most representative A-share stocks listed on the Shanghai and Shenzhen Stock Exchanges.

Despite a lower-than-expected set of corporate earnings results for the first six months of 2009, Simon Godfrey, a Hong Kong-based investment specialist at Fortis Investments, says he anticipates stronger economic growth in the third and fourth quarters. That should ensure better earnings prospects for the whole of 2009, he says, contingent on the global economic recovery.

"While we observe that the China A-share market has entered a phase of uncertainty over the last few weeks, this has created significant value for long-term investors," Godfrey says.

Forward price/earnings valuations at around 20 times forecast earnings are now below their long-term average, Godfrey says.

Meanwhile, in a market update report, Leon Goldfeld, CIO of HSBC Global Asset Management (Hong Kong), notes that the volatility and short-term share price fluctuations in the A-share market aren't surprising considering its emerging market status.

Goldfeld believes the underlying fundamentals that drive long-term returns in the A-share market remain strong. China's recovery in domestic demand, led by the stimulus package, continues to gain momentum, he says.

He echoes what JP Morgan's Ulrich said previously, that the government has indicated its resolve to support the economy. China's government has ensured that it will work towards its 8% annual economic growth target, which will help drive profitability for A-shares. For her part, Ulrich believes that Chinese officials will be able to keep their pledge of sticking to a proactive fiscal policy and moderately loose monetary policy.