China’s stock market will resume its rally after entering a so-called correction as economic growth accelerates and earnings recover, according to Capital Worldwide.

The Shanghai Composite Index plunged 4.7 percent to a four- week low yesterday as the government said its $4 trillion yuan ($585 billion) stimulus package can’tcompletely offset falling export demand. The gauge entered a correction after the retreat from this year’s high surpassed 10 percent. The measure is up 72 percent in 2009.

However, Capital Worldwide strategists have said that they see this decline as a normal correction after five months of steady gains. In a recent address to clients they said that the stock market will continue to rally in the second half as the global and Chinese economies recover and as corporate profits continue to improve.

Capital Worldwide’s comments contrast with Shenyin & Wanguo Securities Co., which said this week investors should sell the nation’s stocks as the market is in “bubble territory“ and share prices already reflect expectations for improving economic growth and profits.

The Shanghai gauge more than doubled from last year’s low as record new lending and the government’s stimulus plan revived growth in the world’s third-largest economy. Gross domestic product expanded 7.9 percent in the second quarter from a year earlier, rebounding from the weakest growth in almost a decade. The benchmark index, which plunged 65 percent last year, more than doubled in both 2007 and 2006.

China’s economy, which avoided following the U.S. and Europe into recession, is yet to cement a recovery as factories have too much capacity and shipments abroad are weakening, officials said this month.

But according to Capital Worldwide, uninspiring statements such as this can be explained in part by the fact that China’s government will tend to be biased towards protecting growth and won’tchange their policy before signs of improvement in private investment, consumption, corporate profitability and employment.

Goldman Sachs Group Inc. this week raised its forecast for China’s gross domestic product growth in 2009 to 9.4 percent, noting that weakness in the global economy would deter policy makers from tightening too soon.

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