China's stock rout to resume as intervention ends, says BofA

 Investors monitor stock market data at a securities brokerage house in Beijing, China on Aug 28, 2015.
Investors monitor stock market data at a securities brokerage house in Beijing, China on Aug 28, 2015.PHOTO: EPA

BEIJING (BLOOMBERG) - The rebound in China's stocks will be short- lived because state intervention is too costly to continue and valuations aren't justified given the slowing economy, says Bank of America Corp.

"As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again," said David Cui, China equity strategist at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35 per cent before shares become attractive, he said.

The Shanghai gauge rallied for a second day on Friday amid speculation authorities were supporting equities before a World War II victory parade next week that will showcase China's military might. The government resumed intervention in stocks on Thursday to halt the biggest selloff since 1996, according to people familiar with the matter.

China Securities Finance Corp., the state agency tasked with supporting share prices, will probably end direct market purchases within the next month or two, Mr Cui said.

While the benchmark gauge trades 47 per cent above the levels of a year earlier, data from industrial output to exports and retail sales depict a deepening slowdown. China's first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis.

Profits at the nation's industrial companies fell 2.9 per cent in July, data Friday showed.

Equities on mainland bourses are valued at a median 51 times reported earnings, according to data compiled by Bloomberg. That's the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor's 500 Index. Even after tumbling 37 percent from its June 12 peak, the Shanghai gauge is the best-performing equity index worldwide over the past year.

The Shanghai Composite rose 4.8 per cent at the close on Friday, paring its weekly loss to 7.9 per cent.