Mainland shares may rise as much as 35 percent next year as the yuan strengthens and earnings growth accelerates, according to Greenwoods Asset Management, manager of this year's best-performing Chinese long-short equity fund.

The gains by A shares denominated in yuan in Shanghai and Shenzhen will probably exceed a forecast increase of as much as 30 percent for mainland companies' H shares traded in Hong Kong, said Greenwood's Hong Kong office head Joseph Zeng.

China shares will extend gains as they have yet to enter a speculative "bubble", and now trade at about 24 times estimated earnings, below the 10-year average of 35 times, Zeng said.

China will probably yield to pressure from trading partners by allowing the yuan to appreciate by between 4 percent and 6 percent by end-2010, easing imbalances that worsened the global economic crisis, he said.

"Be prepared for that," he said in a phone interview from Hong Kong. "It hasn't been priced into A shares."

The $1.3 trillion credit boom and a revival in the property market have triggered warnings about possible asset bubbles by officials and investors, including Fan Gang, the only academic member of the monetary policy committee of the People's Bank of China, and Bill Gross, who runs the world's largest bond fund at Pacific Investment Management Co.

China's overall property market isn't in bubble territory yet either, because the "big gains" in prices were mainly confined to major cities, Greenwoods' Zeng said.

Golden China

Greenwoods Asset's $174 million Golden China Fund has 30 percent of its portfolio in A shares, Zeng said. The fund favors companies whose A shares are trading at lower valuations than their H shares. It also likes companies with "compelling valuations" in industries that are under-represented in Hong Kong, including Hundsun Electronics Co, which develops software for financial companies.

The Golden China Fund, which invests in A shares, H shares and American depositary receipts of Chinese companies, rose 137 percent year to date as of Oct 31, the best return among Chinese long-short equity funds, according to data from Bloomberg and the company. It also has the highest total return over one year, three years and five years among 37 peers tracked by Bloomberg.

US President Barack Obama told Chinese leaders during his visit to Beijing last week the US expects to see progress by next year on making the yuan exchange rate "more flexible", said Jon Huntsman, the US ambassador to China.

In a signal that policymakers aren't yet prepared to loosen controls on the yuan, central bank Governor Zhou Xiaochuan said on Nov 20 China is "passive" on the value of the US dollar.