Chinese actions are poised for another rebound after recent consolidation, with a key meeting in Beijing next month planned to inject more support measures into the market, according to Goldman Sachs and Bank of America.

The recent pullback is “a healthy correction” as the stimulus-fueled rally overheated while momentum on various measures waned, according to Timothy Moe, chief equity strategist for Asia- Pacific at Goldman Sachs. Further upside potential could be unlocked as policymakers announce more support, he added.

“It’s like the market has caught its breath and we expect further upside,” Moe said at a news briefing in Hong Kong on Tuesday.

The MSCI China Index, which tracks 702 Chinese companies listed at home and abroad, has corrected 6.4 percent since its May 20 peak, as renewed geopolitical tensions, uneven macroeconomic data and Persistent difficulties in the real estate market have prompted investors to take profits.

Meanwhile, the Hang Seng Technology Index, which tracks Hong Kong-listed Chinese tech heavyweights including Tencent and Alibaba, has fallen more than 10% since its most recent peak and briefly entered a technical correction Monday.

“We expect the third plenum to contain more announcements in terms of scope and granularity regarding the real estate market,” Moe said. Policymakers may have been slightly disappointed by the market reaction to the previous bailout and have realized that more needs to be done. If the direction charted is firm enough, the stock market will likely find comfort there, he said.

Goldman Sachs’ latest support for Chinese stocks comes after bucking the trend of its Wall Street peers and took a bullish view last month. It raised its 12-month targets for the MSCI China index by 17 percent to 70 and by 5.1 percent to 4,100 for the CSI 300 index of yuan-traded stocks, betting that the recovery in profits and l Expansion in valuations will continue to support the market.
Undemanding price/earnings ratios could lead to a further recovery in valuations, and the nine guidelines announced in April regarding the A shares are very positive from a long-term structural point of view, Moe added.

Of course, risks remain. Other macroeconomic indicators due this week, including consumer and producer price indexes for May, are expected to show that deflationary pressures persist and the economic recovery has yet to find a solid footing. Geopolitical tensions with the United States, particularly in the run-up to the US elections, could also increase and shake the markets.

People walk past the Shanghai Stock Exchange in the Pudong district of Shanghai on June 5, 2024. Photo: AFP

The market is expected to remain range-bound over the coming weeks as it awaits further catalysts, Winnie Wu, chief China equity strategist at Bank of America Securities, said in a note to clients on Friday.

Nonetheless, consolidation at a higher level and improved confidence are constructive signs, she added. “The ‘lower’ potentials should help restore market confidence and attract more investors to revisit China’s investment thesis,” Wu said.