Is the worst over for China's Hong Kong-listed state-owned firms, or H shares? It may be, say analysts, but they advise caution. The market, however, does not appear to be convinced. The Hang Seng China Enterprises Index, which tracks 21 Chinese state firms, is still languishing around 800 points, about 20 per cent above its historical low but 85 per cent below its peak. Investors are no longer shocked by the results released by the H-share companies. The latest interim results have revealed that, of 21 firms, 14 reported earnings cuts of between 8 and 92 per cent. Only six managed to rake up more profit than in the same period last year. Chinese managers blamed tight monetary policy but China analysts saw more problems: bad management, bad marketing and bad information disclosure. There are, however, tentative signs that the H-share market is on the way to recovery. China has cut interest rates twice this year to boost the economy and British investment bank Schroders believes Beijing has an incentive to boost the economy next year when China resumes sovereignty over Hong Kong. More importantly, the Communist Party's Central Committee is scheduled to hold its 15th plenum in the autumn of 1997, and a massive reshuffle is predicted. Officials in the regions are eager to boost growth rates in their areas to increase their chances of winning a seat in the nation's power centre. 'We would not be surprised to see the government make an extra push from the beginning of 1997 so that the economy is at its healthiest in the third quarter of 1997 - in time for the major political events, ' said Tao Dong, Schroders' China economist. Other major investment banks and fund managers appear to agree. Fund manager Templeton's has been reported to have aggressively accumulated H shares. Merrill Lynch said in a recent report that investor sentiment towards selective China plays had improved. Jason Cheung, an analyst at American investment firm Morgan Stanley, said that while short-term sentiment towards H shares was unlikely to improve, long-term value-oriented investors should start to accumulate holdings in the sector because the downside risk seemed to be limited. But they say investors should exercise caution given poor transparency and varied management quality. Merrill Lynch believes the vehicle manufacturing and power sectors are likely to become China's economic recovery plays. Morgan Stanley prefers H-share companies with larger market capitalisation, because these state firms have more liquidity and stronger operations.