UBS's Magnus sees end of China selloff giving way to muted gain

[HONG KONG] The slump in Chinese stocks has about 14 per cent to go, and an eventual rebound won't be vigorous, according to UBS Group AG's George Magnus.

The Shanghai Composite Index may stop its slide around 2,500, the London-based senior independent economic adviser to UBS said by phone. The gauge fell to a one-year low last week, before closing on Friday at 2,916.56. While the measure will end the year above its trough, Mr Magnus said, it won't be substantially higher.

"We may not have touched the bottom yet but it's a lot closer," said Mr Magnus. As for a sustained rally, he says, "you have to be optimistic about a Chinese soft landing and economic transformation, which I'm not personally optimistic about."

Earlier this year, Mr Magnus told Bloomberg Television that volatility in China is masking a credit crisis and a bleak outlook for its economy. He said that while top policy makers promised a wave of reforms in December, they aren't likely to be enough. The Chinese equity gauge fell into a bear market on Jan. 15 for the second time in seven months, wiping out gains from an unprecedented state rescue amid waning confidence in the government's ability to manage the country's markets and economy.

Mr Magnus has a track record for calling the outcome of global upheavals. In July 2007, he warned that the US subprime mortgage-market collapse may not be "containable." In September 2008, he called for the US Federal Reserve, the European Central Bank and the Bank of England to cut interest rates to prevent the financial crisis from worsening, a step they took two weeks later.

The Shanghai Composite is down 17 per cent this year, even after a two-day rally. Chinese shares have had a rocky start amid concern the economic slowdown is deepening and yuan volatility may trigger more capital outflows. The government has continually intervened to stabilize financial markets. The measure climbed 1 per cent to 2,946.42 as of 10:11 am Monday in Shanghai, after a 1.3 per cent increase on Friday.

Chinese shares may be range-bound for some time, Mr Magnus said. The Shanghai Composite traded between 3,500 and 1,950 from August 2009 to March last year, when it embarked on a debt- fueled rally. That eventually turned into a rout after peaking in June.

"What happened in China before was a bit artificial in terms of pumping the market up so it's just returning to base," said Mr Magnus, who correctly predicted in July the rout would deepen. "I don't think China is going into the deep freeze anytime soon." A catalyst for a rebound would be a realization that fears of another 2008, with the world economy going into a recession, are misplaced, he said. "My personal view is those fears are exaggerated, but that's not a view that's shared in the market at the moment."

BLOOMBERG