[SYDNEY] Chinese equities will extend their rout by as much as 35 per cent, taking the Shanghai gauge to half of last month's peak, according to George Magnus, a senior independent economic adviser to UBS Group AG.

"We're going back to where we came from," Mr Magnus told Bloomberg TV from London on Thursday. "The Shanghai Composite is going to go all the way back down to around 2,500-2,800," he said. The measure closed at 3,823.18 on Thursday, after tumbling 26 per cent since June 12.

Mr Magnus said he's bearish on Chinese shares because their rally was never justified amid a weaker economic outlook. While the stock-market boom boosted growth in the six months through June, real estate languished and agriculture grew at about half the overall economy's 7 per cent pace. Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, says China's slowdown in the coming years may spur a world recession.

"What I suppose I'm worried about here is that as we look forward over the next six to 12 months, those processes will continue," Mr Magnus said. "In other words, the economy will continue to decelerate."

Money managers from Bill Ackman to Jeffrey Gundlach and Paul Singer have said they're concerned about the risks posed by China's debt-fueled, volatile stock market. For BlackRock Inc and Templeton Emerging Markets Group, mainland shares need to fall further before they're worth buying.

Hugh Hendry, the hedge fund manager who profited by betting against banks in the financial crisis, is bullish because of unprecedented economic stimulus and the end of a rally in commodities. The Shanghai Composite Index rose 3.5 per cent on Friday, reversing its weekly drop.

Policy makers, seeking to stem the bear-market rout, have banned large shareholders from selling stakes, ordered state-run institutions to buy equities, and let more than half of companies on mainland exchanges halt trading. There may be even more initiatives, Mr Magnus said.

"Having unleashed market forces in the form of a more vibrant stock market over a year or 18 months ago, I think they've been spooked by what markets do," Mr Magnus said.

"Bringing markets with Chinese characteristics into the Chinese economy is clearly one of the objectives that the leadership set a couple of years ago. I just don't think they like the results."

BLOOMBERG