CAPITAL ECONOMICS: The rally in Chinese stocks has some way to run

The Chinese economy has slowed over the past year but that hasn’t stopped the stocks in Shanghai rocketing around 85% in the past 12 months.

But, even though the economy is slowing Chiang Liu and Julian Evans-Pritchard from capital Economics believe that the stimulus associated with policy makers stabilising the economy will continue to drive stocks higher.

We think that the sharp drop-off in economic activity since the start of the year, along with lower inflation, will encourage greater action from the PBOC over the coming months, including further RRR reductions and at least one more cut to benchmark interest rates.

This will most likely push equities even higher this year, and we now think the Shanghai Composite is set to hit 4,000 by year-end.

Bloomberg – SHComp Index 31032015

But the analysts do sound a warning.

“With markets increasingly divorced from economic fundamentals, we expect a partial reversal of these gains in 2016,” Liu and Evans-Pritchard warned.

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