2010-06-29 13:35

China's exports face "strong headwinds" in the second half of the year from policy tightening measures and the European debt crisis, reducing prospects of a rebound in the stock market, Citigroup Inc said.

Chinese stocks will probably stay "range-bound" pending clarity on policies and the economy, Shen Minggao, head of China research at Citigroup, said in a report obtained today. The Shanghai Composite Index, the world's third-worst performer this year, slid for a fifth day, falling 1.8 percent to 2,490.35 at 11:30 am.

"While low valuations are attractive in the near term, risks lurk in terms of earnings downgrades or policy reversal," Shen said.

The government is seeking to sustain the nation's expansion while cooling property prices after record credit growth increased concern that inflation will accelerate. The Shanghai Composite has tumbled 23 percent this year, the most after Greece and Cyprus among the 93 indexes tracked by Bloomberg.

Central banker Yi Gang said June 28 the nation's monetary policies are flexible and could be either tightened or loosened. Analysts are split on whether the People's Bank of China will raise interest rates this year from crisis levels as the world's third-biggest economy surges back from the financial crisis, a Bloomberg News survey showed last week.

The Conference Board today corrected its April gauge for the outlook of China's economy to indicate a slower pace of expansion.

Citigroup's view of the stock market is in contrast with Nomura Holdings Inc, which turned "bullish" last week after the central bank on June 19 signaled it will make the exchange rate more flexible, spurring speculation the yuan will strengthen.