Zhou Liang is the Shanghai-based head of research for China at Lipper. He spoke to AsianInvestor about his outlook for the China A-share market.

What is your outlook for the China A-share market?

Zhou: China is facing the most complex economic circumstances in 10 years. There are several reasons for that. One, the slowdown of the global economy may reduce demand for Chinese products. Second, the continued appreciation of the yuan and the increased labour costs may reduce the advantage of ChinaÆs exporting industry. Third, worldwide inflation caused by energy and agriculture products. Fourth, high domestic asset prices among stocks and real estate. All these will impact the stock market this year. So I think the stock market is very complicated this year and may suffer several corrections. You can see from the beginning of this year, the stock market has been quite weak.

For the medium- and long-term, I think the rapid growth of the Chinese economy is on track. After the correction this year or even next year, the Chinese stock market still has the potential to increase in the medium- or long-term.

So how should investors play the China market now?

Investors should always find better investment strategies. For the conservative investors, they can focus on the fixed-income market for this year. These investors wonÆt make too much money this year, but they will at least get a return higher than inflation.

For the aggressive investors who want to invest their money in the stock market, I suggest they can raise their allocations in the overseas-listed Chinese companies, most especially in Hong Kong.

You donÆt expect the China A-share market to recover from its early losses this year?

Yes. It is quite difficult to forecast the trend of the index, but I believe it will suffer a larger correction.

Are China A-shares the best way to get exposure to the mainlandÆs long-term growth story?

If we compare the A-shares and H-shares, they are both effective methods for investors to get exposure to China assets. But the advantages are different. In the A-share market, you can find much more companies or sectors. In the H-share market, you can find cheaper stocks. It depends on what is more important to investors, the kind of exposure or the valuations.

How has the floating of the previously restricted shares affected the China A-share market and how will this affect the market in the future?

I think the floating of the restricted shares will influence the market heavily. The total amount of shares involved is quite large. Because the market is going down, I think quite a lot of these shares will add to the pressures on the market.

Do you think index futures will be introduced this year?

I think the right time for the government to introduce index futures is when there is a stable stock market environment. But this year, the stock market is quite complicated. So there is not a good chance that the index futures will be launched this year.

You donÆt think itÆs a good idea?

Not for this year. But in the future, yes, because the market will need index futures in the long-term.

What are the important issues that need to be monitored right now?

The government plans to launch a market like Nasdaq in China for small companies that need to raise money. I think it will happen this year. The government has released news that this will happen this year.

Is this going to be a good development?

I think it will increase efficiency of the investment industry, there will be more choices.

What are the main challenges of investing in China A-shares?

The complicated circumstances and the higher valuations.

Are companies better researched now and more transparent?

It is difficult to compare China and other markets in terms of corporate transparency. But for the larger companies, many or around 500 of the listed 1,500 shares in Shanghai and Shenzhen are well-researched. That is a huge change from around five years ago.

The domestic market has a capitalization of around Rmb32 trillion ($4 trillion), of which around Rmb8 trillion ($1 trillion) are floating. The market provides a good variety of stocks to choose from, with 30% of the market made up of manufacturing companies, 20% financial and insurance, 11% mining, 9% transportation and storage, and others.