Analyst who made correct call on China’s market this year now favours Chinese government bonds over stocks

China’s bonds will outperform stocks in the remainder of this year as growth in the world’s second-largest economy shows no signs of bottoming out, according to an analyst who correctly predicted the gyration on Chinese equities in the first half.

China will struggle to keep economic growth at around 6 per cent as entrepreneurs’ confidence weakens, investment growth slows and exports wane amid a looming risk of a global recession, said Chen Li, chief economist at Soochow Securities, at a briefing in Shanghai on Thursday. Meanwhile, he said the stock benchmark Shanghai Composite Index is unlikely to rise above this year’ high set in April through the rest of 2019.

“China’s economic growth is far from hitting the bottom and it’s still on the downward trajectory without stabilising,” Chen said. “The bond yields will fall to incredible levels in the next one or two years.” He did not give a specific target for the yield.

The yield on the nation’s sovereign bonds maturing in 10 years hovered around 3.25 per cent on Friday, close to its lowest level in two months. The latest economic data released last week by the statistics bureau showed industrial output and fixed-asset investment both trailed analysts’ estimates in May. China’s economy expanded by 6.4 per cent in the first quarter, the weakest pace of growth in a decade.

Chen’s call on China’s stocks this year has proved prescient. In an interview in January, he said the first quarter was the best time to buy Chinese stocks because of loose monetary policies and prospects of foreign capital inflows. He also cautioned the gains may be unsustainable going forward, with a moderation in economic growth dampening sentiment.

The Shanghai Composite had jumped 31 per cent through the middle of April this year before the run-up faltered, with policymakers moving to pare stimulus and the China-US trade relationship deteriorating. The benchmark is down 8.2 per cent from this year’s high.

Still, Chen said Chinese stocks may have a mild rebound until August or September after turbulence over the past two months. Expectations that the central bank will soon cut the reserve requirement ratio, policymakers will ramp up fiscal tools to support growth, and the China-US trade tension will ease are likely to fuel the uptick in equities, he said.

“But it’s simply a rebound and there’s a low chance that the index will surpass this year’s high,” he said. “There’s a long-standing concern about growth.”

The Shanghai Composite rose 0.5 per cent to 3,001.98 on Friday for a fifth straight day of gains, closing above the 3,000 gateway for the first time in almost two months. That implies limited room for further upside on the index, as a gain of as much as 9 per cent from the current level will meet Chen’s target.

The comeback in stocks has gained traction after President Xi Jinping and US President Donald Trump agreed this week to restart trade talks at the Group of 20 meeting next week in Osaka, Japan. It also comes as the Chinese central bank moved to inject funds to alleviate panic about a liquidity squeeze following the takeover of Baoshang Bank.

Chen, who previously worked as a China stocks strategist at UBS Group and Credit Suisse Group, was ranked among the top three spots by Institutional Investor magazine every year between 2010 and 2017. He joined Soochow Securities last year.