SHANGHAI - China's Shanghai Composite Index, the first of the 10 biggest benchmark measures to enter a bear market this year, will rebound as a surge in exports lowers the risk of a slump in economic growth, according to Franklin Templeton's local fund management unit.

The index rose 0.3 percent to 2655.71 on Wednesday, rebounding from a 1.9 percent drop on Tuesday that pushed losses from a November peak to more than 20 percent, the definition of a so-called bear market. The market's slide came after government reports showed inflation accelerated last month, bank lending beat estimates and property prices jumped by a record.

"The market has reached its bottom this year and is poised for a rebound," said Xu Lirong, who oversees about $2.6 billion at Franklin Templeton Sealand Fund Management Co in Shanghai. "Recent declines are overdone and further tightening measures such as interest-rate increases are already priced in."

Xu joined Hamon Asset Management Ltd's Hugh Simon and RCM Asia Pacific Ltd's Mark Konyn in saying that the worst is over for Chinese stocks after the Shanghai Composite Index plunged 19 percent this year on concern the government will raise interest rates to contain inflation and crack down on speculation in the property market.

China's exports increased a faster-than-estimated 30.5 percent in April, easing concerns that Europe's debt crisis would halt the global recovery. European policymakers unveiled an unprecedented loan package this week worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.

The Chinese government should focus on preventing excessive increases in asset prices and liquidity after Europe's loan package reduced the risk of another global slump, according to central bank adviser Li Daokui.

Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said on Tuesday. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

"Inflation was in line with expectations," said Konyn, who oversees $12 billion. "The worst is behind us and we are buying on weakness. There's an opportunity by the fourth quarter for a recovery as measures take effect. It takes time."

China's central bank ordered lenders this month to set aside more deposits as reserves for a third time in 2010. The government imposed a ban in April on loans for third-home purchases and raised mortgage rates and down payment requirements for second-home purchases to curb housing prices.

Investor Marc Faber reiterated this week his May 3 prediction that China's economy will slow and possibly "crash" within a year as declines in stock and commodity prices signal the nation's property bubble is set to burst.

"We will have a slow down, that's for sure," Faber, the publisher of the Gloom, Boom & Doom report, said on May 10. "Will we have a crash? That's quite possible. China is trying to cool the speculation and that will have an impact on economic activity."

The decline pushed the Shanghai Composite's valuation to 19.8 times reported earnings, almost half the 37 multiple during its 2009 peak on July 31, data compiled by Bloomberg showed.

This year's plunge in Chinese stocks has "played its course" and consumer companies are among those that may benefit most from a potential rebound, Hamon Asset's Simon said on Tuesday.

Only the Athens Stock Exchange General Index has had a bigger loss among 93 primary stock indexes tracked by Bloomberg this year, tumbling 21 percent on concern Greece may default on payments of its sovereign debt.

"China's fundamentals are much better than Greece," said Templeton's Xu. "We are just going to slow growth a bit with the economy at risk of overheating. The risk of a hard landing is very minor because exports have gained strength."

Bloomberg News

(China Daily 05/13/2010 page17)