Investors advised to use current China rally to sell

Hong Kong

VOLATILITY in the world's wildest stock market is finally receding. If that's one argument for buying Chinese shares, Bocom International Holdings Co's Hao Hong has a long list of reasons why you shouldn't.

For one, the Shanghai Composite Index's valuation is above its long-term average, even after a 41 per cent drop in the benchmark gauge since mid-June. Government efforts to bolster the yuan will drain market liquidity, Mr Hong says, and plummeting equity volumes suggest investors lack faith in a rebound. He rejects the notion that targeted economic stimulus is enough to revive the bull market.

After distinguishing himself as one of the few forecasters to predict both the start and peak of China's equity boom, Mr Hong is once again breaking ranks with peers as mainland markets resume trading after a week-long holiday. He says the Shanghai Composite needs to fall 18 per cent to 2,500 before it's cheap enough to buy, while the average estimate fr…