http://www.bloomberg.com/news/2010-10-20/buy-china-stocks-on-dips-after-interest-rate-boost-goldman-sachs-says.html

Buy China Stocks on `Dips' After Interest Rate Boost, Goldman Sachs Says

Investors should buy Chinese stocks on any “dips” following an interest-rate increase in the nation, Goldman Sachs Group Inc. said. Higher rates are a “positive” signal for equities, JPMorgan Chase & Co. said.

The central bank yesterday unexpectedly raised borrowing costs for the first time since 2007, lifting the benchmark one- year lending rate to 5.56 percent from 5.31 percent. The deposit rate was increased to 2.5 percent from 2.25 percent.

“We would buy into any major market dips for the medium to longer-term upside as we believe that earnings are solid, valuations are reasonable and the rate hike could actually remove a risk overhang,” Goldman Sachs analysts including Helen Zhu and Timothy Moe wrote in a report. Market declines after previous rate increases were “short-lived, if any,” they wrote.

The Shanghai Composite Index gained 0.1 percent to close at 3,003.95 today, reversing an earlier 2 percent loss. The benchmark gauge has surged 13 percent this month after lagging behind other emerging markets and as a higher yuan drew increased capital inflows.

China’s policy makers are trying to curb lending and prevent an asset-price bubble in a country that surpassed Japan this year as the world’s second-largest economy.

Wang Tao, head of China economic research at UBS AG, said investors’ initial reaction to the surprise rate increase was likely to be negative, especially for property developers.

“However, in general, we think the market should see the rate hike as a speed bump on the road,” Wang said in a report. “It also reflects the government’s confidence in the strength of economic activity.”

‘Hot Money’

The rate increase will raise expectations for an appreciation in the yuan and encourage more inflows of “hot money,” Shenyin & Wanguo Securities Co. analysts led by Li Huiyong said in a report. Yuan-denominated assets become more attractive and the decision indicates confidence among policy makers on the strength of the economy, Citic Securities Co. said.

China’s manufacturing expanded at the fastest pace in four months in September, while industrial output rose 13.9 percent in August, exceeding economists’ estimates. Citing the economy’s outlook, Moody’s Investors Service on Oct. 8 put the nation’s debt rating on review for a possible upgrade.

Ma Jun, head of Hong Kong and China strategy at Deutsche Bank AG, said higher borrowing costs will hurt the outlook for developers and commodity producers.

“Rate increases will also be negative for commodities, as their demand growth is highly sensitive to overall investment and loan growth,” he said.

China’s interest-rate increase is a “positive signal” for the nation’s equity market as it supports a view that economic growth may have bottomed out and is set to recover, Frank Li and Peng Chen, analysts at JPMorgan in Hong Kong, said in a report.

--Chua Kong Ho in Shanghai, Chen Shiyin in Singapore. With assistance from Zhang Shidong. Editors: Allen Wan, Richard Frost