More pain seen for China stocks before recovery

By Lu Jianxin

SHANGHAI (Reuters) - China's stock market, the worst performer of the world's major markets last year, faces more bad news from grim corporate earnings in the coming months, but signs are pointing toward a recovery starting in the second quarter.

By late April, the bad earnings news will be out of the way, liquidity in the markets will be rising and nascent expectations of a bottoming in economic growth rates will, analysts say, be on firmer ground.

But those hoping for an explosive rally may be disappointed as investors lick their wounds after big losses and a heavy supply of new equity absorbs much of the flow of new funds reaching the market.

"The common belief now is that China's economy will bottom out in the second quarter as the government takes more steps to ensure 8 percent growth, pumping liquidity into the system," said Wu Xiong, research manager at Orient Securities in Shanghai.

"So the stock market is also likely to begin a real rebound early in the quarter, but a bull run won't be in sight this year as confidence will need time to recover."

Among eight analysts, economists and fund managers polled by Reuters over the past week, six believe China's benchmark Shanghai Composite Index .SSEC could fall to around 1,500 points in late March or April -- the peak of the 2008 corporate earnings reporting season.

The index has climbed back to the 2,000 mark since the start of 2009 after ending last year at 1,820.8 points, a loss of 65 percent during 2008.

The six also forecast the index would recover around late April, reaching a peak around 2,500 points late in 2009, with further gains depending on the extent of recovery in the Chinese and global economies. The other two forecast a wider range of 1,300 to 3,000 for the year.