FOCUS: Recent Slump Doesn't Signal End To China Share Rally

China's most-watched share index has tumbled 16% over the past two weeks but analysts say this doesn't mean the party is over, largely because Beijing probably doesn't want it to be.

The share market should benefit from still-flush liquidity, a likely improvement - albeit at potentially a slower pace - in economic readings, and possible market-supportive moves from Beijing.

And with the 60th anniversary of the Chinese Communist Party's rule on Oct. 1, officials will want the stock market to look good for that big event. So any near-term correction may not be big.

Beyond Oct. 1, the outlook is less clear. But going by history and the current loose monetary policy settings, analysts generally think Beijing will only gradually let the air out of the market's tires.

Investors in the more developed markets tend to use the A-share market as a proxy for sentiment on the health of China's economy. So Monday's 5.8% slump in the Shanghai Composite Index sent jitters around the globe.

But the stock market's ups and downs don't necessarily reflect the domestic investing community's short-term view on China's economy; analysts on the mainland say liquidity and policy cues are the main market drivers for a market that has been due a breather.

"None of the factors that we can blame the markets' recent steep losses on are unknown or unanticipated. The most plausible explanation is therefore a technical correction," said Shenyin and Wanguo Securities analyst Neil Li, who doesn't expect the Shanghai Composite to fall beyond 2500.

The index certainly has been on a tear. It hit this year's high of 3478.01 only on August 4; even taking the recent correction into account, it is up 75% from last year's lowest point of 1664.93. It closed Tuesday at 2910.88. A shares - which are largely tradable only by domestic investors - are trading at a price-to-earnings ratio of around 25 times their estimated 2009 earnings. P/E ratios in China have historically ranged from slightly over 10 times to up to 60 times.

That suggests room to correct further, but perhaps not far, or for long.

Guoyuan Securities strategist Simon Wang, who pegs support around 2600 for the Shanghai index, thinks shares will rebound before Oct. 1. "The widespread belief that Beijing doesn't want the markets to fall before October 1 will become a self-fulfilling prophecy. Improvements in corporate earnings and macro data will be seized upon as an excuse to buy as the celebration approaches. Our clients are waiting to dive in again," he said. link....