HSBC joins investors reckoning worst is over in China

By Tom Westbrook

SINGAPORE, Oct 26 (Reuters) - Analysts at Europe's biggest
bank HSBC have turned bullish on Chinese stocks,
arguing the worst of a regulatory storm has passed and that
Beijing will provide policy support to arrest slowing growth.

HSBC said on Tuesday it had upgraded its recommendation on
Chinese equities to "overweight" from "neutral", joining a small
but growing chorus of investors who reckon the tide is beginning
to turn.

"We think the baby is being thrown out with the bathwater,"
the HSBC analysts said in a report which had Herald van der
Linde, head of Asia-Pacific equity strategy, as its lead author.

"Yes, China is struggling with growth, and a stronger dollar
is not good news for China's stock markets. But that's now
well-known and is priced in," the report said.

This year MSCI's China index has fallen
about 12% compared with a 15% rise in MSCI's world stocks index
, as crackdowns spanning technology firms'
behaviour to property borrowing have pounded share prices.

HSBC is among a few in the financial sector calling time on
the selloff. Asset manager BlackRock said a month ago it
was dipping its toes back into Chinese equities.

On Monday strategists at Citi Private Bank also said they
were modestly overweight on Chinese equities, while analysts at
Goldman Sachs unveiled a "Common Prosperity" portfolio which
they said had been insulated from regulatory risks.

"As growth is slowing, we expect Beijing to introduce more
targeted easing measures in the coming months," said the HSBC
analysts.

"As for regulations, which have battered the China internet
sector so much this year, they tend to come in cycles ... the
focus eventually shifts to growth and stability, especially
heading into the twice-a-decade Party Congress next year."

HSBC cited the beaten-down real estate sector as
particularly attractive over the longer term, though concerns
about fallout from troubles at teetering giant China Evergrande
may weigh on prices for a while.

It has "buy" recommendations on developers China Resources
Land, Longfor Group Holdings and Shimao
.

Evergrande said on Oct. 24 it had resumed work on more than
10 projects, after it appeared to avert default with a
last-minute bond coupon payment last week.
(Reporting by Tom Westbrook; Editing by David Holmes)