China's improved macro-economic picture should set the stage for an overdue recovery by H shares this year, analysts say. H shares have been consistent losers for more than two years, but easier credit conditions are likely to stimulate consumer demand and lift company earnings in 1997. The expectation is that the recovery will start to trickle in from the second quarter, with the impact becoming more pronounced in the second half. A recent rally in H shares - Chinese state-owned enterprises handpicked by Beijing to list on the Hong Kong exchange - has ignited some hopes that fans of the once-maligned sector have come back. Most analysts, however, find the upsurge highly speculative. BZW Asia head of China research Lawrence Ang said: 'Despite the recent fluctuation in H shares, the market has turned around and there is a revival of interest as investors are buying on China's improved macro-economic story.' He said fund managers seeking greater China exposure would start raising their weighting in H shares, switching from expensive red chips. In particular, investors have been expecting another round of interest rate cuts from Beijing, which should help the balance sheets of many indebted H-share firms. BZW predicts earnings per share (EPS) will rebound 19 per cent this year, and another 12.3 per cent in 1998. It forecasts an 18.1 per cent slide in 1996 average EPS, after an average EPS fall of 6.2 per cent in 1995. Mr Ang said: 'The sector's earnings growth [in 1997] will be driven by the automobile sector, such as Qingling Motors, because the industry is highly co-related with an economic recovery.' He expected Maanshan Iron and Steel, Shanghai Haixing Shipping, Dongfang Electrical Machinery, Guangdong Kelon Electrical, Nanjing Panda Electronics and Anhui Expressway to see higher earnings. Petrochemicals stocks, once a sparkling sector, would continue to be plagued by the rising crude oil price, which could erode their profits. As a note of caution, Mr Ang predicted more Chinese firms would capitalise on the resurgence of the market to float on the exchange, leading to a glut in H-share supply. 'I don't believe H shares will have a massive rise [in 1997], but it is not difficult to see an appreciation of 20 per cent on average,' Mr Ang said. Kleinwort Benson Securities (Asia) head of China research Ann Shih took a more cautious approach. She said this was not time for bottom fishing because companies, haunted by the lingering impact of the credit crunch, would only see earnings recovery in the second half of the year. 'I believe that  results will be poor, but the first-half results will be even worse.' She said there would be an extended time lag before the impact of easier credit would be felt by the companies' bottom lines. Crosby Securities China investment analyst Raymond Jook said China would start a new economic cycle next year, but companies would have to wait until the second half before they saw a more pronounced earnings improvement. 'It's not time to increase the H shares' weighting substantially,' he said. 'Investors will look for more concrete evidence of a recovery before buying up the shares because many have been disillusioned before.' The brokerage is recommending six recovery stocks - Anhui Expressway, Zhenhai Refining, Qingling Motors, Dongfang Electrical Machinery, Shanghai Petrochemical and Guangdong Kelon.