HONG KONG • China’s benchmark stock index will trade weaker than current levels for much of next year as an official deleveraging campaign crimps credit growth and keeps interest rates elevated, according to Bocom International Holdings Co Ltd’s Hao Hong.

The Shanghai Composite Index will move between 2,800 and 3,900 for the next 12 months, with brief episodes of volatility driven by changes in liquidity conditions, Hong wrote in a research note to clients. That compares to a current level of around 3,300. Large cap stocks have surged in 2017, and their valuations are approaching extreme levels, he added, predicting a “zig-zag” rotation into smaller peers.

Next year will again “prove to be a structurally diverging market, and traders will once again have to work within the constraints of limited liquidity”, said Hong, who distinguished himself as one of the few analysts to forecast both the start and 2015 end of China’s equity boom. “Contrary to the experiences of 2017, small caps will likely be back in favour.”

China’s larger firms have outperformed on the mainland this year, with the CSI 300 Index surging more than 21%. — Bloomberg