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Merrill Lynch hikes China growth forecast



July 28, 2009 – Comments (0)

Asia Markets

Jul 27, 2009, 11:30 p.m. EST

Merrill Lynch hikes China growth forecast Explore related topics Asia Pacific Inc China Railway Grou

By Lisa Twaronite, MarketWatch

TOKYO (MarketWatch) -- While the jury is still out on whether China can sustain its pace of growth, one already optimistic forecast just got even brighter, which could be good news for investors in mainland Chinese shares.

Bank of America Merrill Lynch raised its forecast Monday for the world's third-largest economy to grow 8.7%, from 8.0% previously. Recent economic data "convinced the market that China's recovery is real," said Merrill economist Ting Lu in a note.

"For some time our 8.0% growth forecast for 2009 marked the top of [the] forecasting range, and was even deemed as controversial and unrealistic," Lu said. "What a difference two quarters make! Recent data suggests that China surpassed our expectations."

Merrill now expects China's gross domestic product to grow 9.2% in the third quarter and 11.3% in the fourth quarter. It also raised next year's growth rate to 10.1% from 9.6%.

Earlier this month, China reported its economy increased by 7.9% in the second quarter. See full story on China's economic growth data.

"The growth rate confirmed that the government's massive stimulus measures, which include fiscal expenditure and rapid credit expansion, have supported the economy, although exports continue to decline," said Charles Ma, an investment specialist at Fortis Investments in Hong Kong.

"Policies promote domestic consumption, including subsidies for household appliances, have also resulted in stable growth in the retail sector," Ma said in a recent report.

New vehicle sales in China, for example, jumped 36.5% in June from a year earlier, marking the fourth straight month that vehicle sales have topped 1.1 million units, according to data released earlier this month. See full story on Chinese auto-sale data.

Domestic demand-focused stimulus efforts should also help companies such as Chinese Internet portal Inc. /quotes/comstock/15*!sohu/quotes/nls/sohu (SOHU 61.71, +2.64, +4.47%) , which benefits through its online advertising.

"Automobiles and Fast-Moving Consumer Goods are the two leading growth segments" for Sohu, said J.P. Morgan Securities analyst Dick Wei in Hong Kong, who has an overweight rating on the stock. But he removed it from the firm's focus list because its next big game will be delayed for about nine months to the third quarter of 2010.

Sohu said Monday its net profit for the three months ended June 30 fell 23% to $30.9 million, or 79 cents a share, from $40.2 million, or $1.02 per share, a year earlier. But the results still beat forecasts: Analysts had expected a net profit per share of 72 cents, according to Thomson Reuters.

Railways in focus

Some analysts have voiced concern that China could face a "W"-shaped recovery, with another downturn coming, as growth in government-led fixed-asset investment eases to around 10% over the next 12 months.

But even if growth slows, some segments will surely continue to benefit from the stimulus. One of those areas is domestic transportation.

"We expect four regional railway hubs to emerge, covering 80% of the population and 87% total China GDP. The railways should regain share of the transportation system on the back of mass investment in new line expansion and upgrades," said Morgan Stanley analysts Kate Zhu, Bin Wang and Kevin Luo.

China Railway Group Ltd. /quotes/comstock/22h!e:390 (HK:390 7.23, +0.08, +1.12%) is their top pick in the sector, given its attractive secular trend and relatively reasonable valuation, they said in a research report.

On Tuesday, the Hang Seng China Enterprises Index, or H-share index, which tracks mainland Chinese shares traded in Hong Kong, was up 0.4%, against a mostly downbeat regional backdrop.

Hong Kong's benchmark Hang Seng Index was up 0.2%, while the Shanghai Composite Index was down 0.6%.

Elsewhere around the region Tuesday, Taiwan's benchmark Taiex was up 1.2%, South Korea's Kospi was down 0.3%, and Australia's S&P/ASX 200 was up 0.2%.

Japan's Nikkei 225 Average ended the morning session down 0.3%.

Lisa Twaronite reports for MarketWatch from Tokyo.

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