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“Stimulus – be careful what you wish for.”That’s the title of the latest note to clients from BofA Merrill Lynch’s Hong Kong equity strategists led by David Cui, who are not big fans of China’s attempts at stimulus in recent years.
With growth in China slowing and a recent pronouncement by Chinese Premier Wen Jiabao that the government would proactively institute policy measures to support economic growth, the BAML Hong Kong team sees two possible scenarios.
The first would see the Chinese government implementing a stimulus package similar to that of 2008 and 2009, when Lehman Brothers collapsed and sent shockwaves through the global economy.
The second option, which they think is more likely and is in line with recent comments by Chinese leaders, is that “there will be selective fine-tunings to stabilise growth, but not to hold it up artificially.”
Here’s how both of these options would play out on the HSCEI (the Hong Kong index on which “H-shares” of mainland Chinese companies are traded):
If our view is right [about pursuing only fine-tuning], HSCEI may test the Oct 2011 low (some 15% downside from here) in the coming months, especially if Europe doesn’t stabilise. However, if contrary to our expectations, the government decides to stimulate aggressively again, we may see some 20-30% bounce for MSCI China, more so in investment driven sectors, followed by a severe sell-off – after all, the last stimulus has not had a lasting positive effect on the market.
…If there is another round of significant stimulus, after a rally that may last for a few months, we expect the market to be sold off severely, way pass their past trough valuations. Our view is based on the market experience after the last round of major stimulus and our belief that any major stimulus will compound China’s imbalance problem, not mentioning even more heightened financial system risks. This, in the long term, is a worse scenario than living with immediate lower growth in our opinion.
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