Those betting on rebound in China stocks are wrong

His forecast contrasts with local stock analysts who remain bullish

(SHANGHAI) Investors betting on a rebound in China's tumbling stocks are setting themselves up for more losses, according to Marc Faber, who told investors to bail out of US stocks before 1987's so-called Black Monday crash and correctly predicted last August that the US would enter a bear market.

The CSI 300 Index has plunged 52 per cent from its October record as the government raised interest rates six times last year to cool the economy and commodities prices surged, fanning inflation. Mr Faber's forecast contrasts with local stock analysts, who remain as bullish as ever. 'Buy' calls still make up two-thirds of all recommendations for Chinese stocks, virtually unchanged from the market's peak, according to Bloomberg data.

'I just wouldn't buy,' Mr Faber said in an interview in Bangkok on July 4. 'When a bubble bursts, you only hit bottom when people totally give up and vow they'll never buy stocks again. People are still more worried they'll miss the next rally.'

China's rout has wiped out more than US$2 trillion in market value after the CSI 300 more than doubled in 2006 and 2007, making its shares the world's priciest and prompting the government, Alan Greenspan, Warren Buffett and Mr Faber, to warn of a bubble.

The last time that Chinese stocks fell by half - from a June 2001 high - the Shanghai Composite Index took four years to reach its low. More than 60 per cent of China's retail investors are 'confident' about the performance of the nation's stock market in the next two years, the Shanghai Securities News reported on July 4, citing a survey that it conducted with StockStar.com, a provider of financial data via the Web.

The declines sent valuations for stocks on the CSI 300 Index to their lowest in more than two years last week, with the benchmark trading at 19.9 times reported earnings, a level last seen in April 2006. Liu Yang, managing director at Atlantis Investment Management Ltd, which oversees about US$4 billion in assets, expected a rebound.

'Fundamentals are very strong in China compared to any other Asian nation,' said Hong Kong-based Mr Liu. 'Chinese stocks are trading at crisis valuations. Do they deserve to trade at crisis valuations? The answer is no. The market deserves a very good rebound from here.'

China, the world's fastest growing major economy, grew 10.6 per cent in the first quarter. That's the ninth straight quarter that growth has exceeded 10 per cent.

Mr Faber, publisher of the Gloom, Boom & Doom Report, also said that Chinese shares could bounce off lows, though only temporarily. 'We could have rebounds of 20 to 30 per cent, but I wouldn't bet on it,' he said. 'I would rather use rebounds as a selling opportunity.'

The CSI 300 Index gained as much as 3.6 per cent yesterday, after China Merchants Bank Co and China Citic Bank Corp said that first-half earnings probably more than doubled. -- Bloomberg