Shanghai stocks set to languish on economy worries

SHANGHAI (Reuters) - Doubts about the global economy and China's strict domestic property controls will likely send Shanghai shares lower by year-end, overshadowing strong corporate earnings, a Reuters poll showed on Thursday.

China's benchmark Shanghai Composite Index .SSEC will close the year at around 2,525 points, down around 3 percent from Thursday's close of 2,602, according to a poll of 12 analysts conducted over the past week.

While representing a reversal of expectations for solid gains seen in previous polls, median forecasts from the latest survey showed the index would likely bounce back to 2,950 points by the middle of next year.

Despite recording the strongest growth amongst major economies this year, Chinese shares have been among the world's worst performers, falling over 20 percent so far.

"With the global economic recovery at a very difficult juncture and as stimulus policy wears off, the market is anticipating the possibility that Shanghai shares will search for a bottom again," said Wen Lijun, analyst at Nanjing Securities.

In the poll conducted in March, analysts saw the index reaching 3,550 points by year-end. In June, they revised that forecast to 2,700 points.

Meanwhile Hong Kong's Hang Seng index .HSI, which is currently trading about flat for the year, is seen rising to 23,000 by year-end, for a 6 percent gain on the year. <EPOLL/HK>

China's stock market, which rose 80 percent last year, is generally volatile due to the large number of speculative retail investors, who make up three quarters of market turnover.

Shanghai shares plunged as much as 30 percent earlier this year as Beijing took steps to restrain the country's red-hot real estate sector and tighten liquidity by approving a slew of large initial public offerings and fundraising by major banks.

Analysts were mostly bearish on the market outlook for the remainder of the year, despite Chinese listed companies reporting a 41 percent jump in their combined net profits in the first half.

Only 5 of the twelve respondents thought the market had troughed.

2011 LOOKS BRIGHTER

The poll was conducted largely before China announced strong industrial output and investment figures for August, but analysts said concerns still lingered over whether global economic weakness would have a major impact on exports.

Analysts were more bullish on the prospects for 2011, with all but three of the 12 analysts polled saying Chinese shares would rise from current levels next year.

The median forecast is for Chinese stocks to trade at the 2,950 mark by the middle of next year, up 13 percent from current levels, as the health of the global economy becomes more clear and investors become more certain that Beijing's controls on the property market will ease.

"The index has little space to rise against the backdrop of the severe property policy, but the low valuations of large cap shares are a supportive factor going forward," said Huang Xiangbin, analyst at Cinda Securities in Beijing.

Some analysts, though, were more positive on the outlook for Chinese shares in the near term, with a few predicting gains of 12-30 percent by the end of this year.

"China's economy is definitely maintaining fast growth. While China is tightening property policy controls, the government is also boosting new emerging industries. This structural readjustment makes it hard to prevent an uptrend," said Chen Shaodan, analyst at China Development Bank Securities in Beijing.

(Additional reporting by David Lin and additional polling by Bangalore Polling Unit; Editing by Jason Subler and Jon Loades-Carter)