SHANGHAI - China's exports face "strong headwinds" in the second half of the year from policy tightening measures and the European debt crisis, reducing prospects of a rebound in the stock market, Citigroup Inc said.
Chinese stocks will probably stay "range-bound" pending clarity on policies and the economy, Shen Minggao, head of China research at Citigroup, said on Tuesday. The Shanghai Composite Index slid for a fifth day on Tuesday, falling 4.27 percent to 2427.05.
"While low valuations are attractive in the near term, risks lurk in terms of earnings downgrades or policy reversal," Shen said.
The government is seeking to sustain the nation's expansion while cooling property prices after record credit growth increased concern that inflation will accelerate.
The Shanghai Composite has tumbled 23 percent this year, the most after Greece and Cyprus among the 93 indexes tracked by Bloomberg.

Central banker Yi Gang said on June 28, the nation's monetary policies are flexible and could be either tightened or loosened.

Analysts are split on whether the People's Bank of China will raise interest rates this year from crisis levels as the world's third-biggest economy surges back from the financial crisis, a Bloomberg News survey showed last week.

Contrasting views

Citigroup's view of the stock market is in contrast with Nomura Holdings Inc, which turned "bullish" last week after the central bank on June 19 signaled it would make the exchange rate more flexible, spurring speculation the yuan will strengthen.

The revaluation of China's currency won't happen quickly or fix all the global economy's imbalances, International Monetary Fund Managing Director Dominique Strauss-Kahn said on Monday.

China indicated on June 19 that it was scrapping the yuan's two-year-old peg to the dollar, pledging a more flexible exchange rate.

The decision will slow exports this year, adding to difficulties that include the European debt crisis and rising costs, Yu Jianhua, a Ministry of Commerce director general, said at the Group of 20 meetings in Toronto over the weekend.

China's exports jumped 48.5 percent in May from 2009, the biggest gain in more than six years. Shipment growth may slow as Europe's deficits undermine investor confidence and force governments to step up spending cuts, clouding the economic outlook.

Europe is China's largest export destination, accounting for 20 percent of overseas sales.

Slowing loan growth

The central bank has ordered a larger proportion of deposits as reserves at lenders three times this year to rein in investment growth after banks advanced a record 9.59 trillion yuan ($1.41 trillion) of new loans in 2009.

Loan growth will slow to 18 percent by the end of the year from 21.5 percent in May, Shen said. This will be a drag on money supply growth and "weigh" on the stock market, he said.

The Hong Kong, China-based analyst recommended "high valuation structural plays" because of their better earnings outlook.

Among Citigroup's top buys are Ping An Insurance (Group) Co, Dongfeng Motor Group Co and Ctrip.com International Ltd.

Angang Steel Co and Maanshan Iron & Steel Co were cited as top sells.