The Hong Kong stock market is forecast to contract 10 to 15 per cent in the short term after its three-month rally, but market momentum to the upside is expected to last for at least two to three years given stronger fundamentals and signs of recovery in the mainland economy, according to Citibank. The Hang Seng Index has gained 25 per cent over the past six months, mainly spurred on by a 35 per cent rise in the second quarter, the best quarterly performance in 15 years. Citibank said yesterday the stock market risked a slight contraction in the late summer as the global economy had still to reach the end of its deterioration. Meanwhile, investors were gaining confidence in the mainland recovery, helping the Hang Seng Index to claw back previous losses. 'We believe those China plays will maintain their strong performances in the second half,' said Catherine Cheung, the head of investment strategy and research at Citibank. 'The mainland property and banking industries deserve their higher valuations because of improved market sentiment.' There have been recent signs of economic recovery on the mainland. Power output increased 2.2 per cent last month for the first time since October last year, while the purchasing managers' index rose to 53.2, brightening hopes of achieving the official target of 8 per cent growth. New loans amounted to 5.8 trillion yuan (HK$6.58 trillion) in the past five months, and Citigroup analysts expect the central bank to continue to adopt a loosening monetary policy in the second half to boost total lending to 9 trillion yuan by the end of the year. Residential housing sales on the mainland have enjoyed a 49 per cent year-on-year rise over the past five months as demand remained strong and low interest rates encouraged buyers to enter the market. 'Some of the shares of mainland developers have already rebounded considerably, which affects their future potential on gains from rising property prices. However, those based in top-tier cities might still benefit from strong demand,' Ms Cheung said. The Hang Seng Index slid 1.23 per cent yesterday to 17,979.41 points after staying above 18,000 in the previous six trading days.