China's stocks may extend this year's rally as the nation's economic recovery strengthens and earnings improve, according to CITIC Securities Co, the nation's largest brokerage by market value.

The Shanghai Composite Index is up 69 percent this year as a $586-billion stimulus package and record lending drove China's rebound from the deepest economic slump in almost a decade.

Data due today will show the economy expanded 9 percent in the third quarter, the fastest pace since September 2008, according to the median estimate of economists surveyed by Bloomberg.

"Stable government policy and the September economic numbers should boost the market," said CITIC Securities analysts led by Yu Jun, in a report dated Tuesday. The brokerage recommended shares of insurers, banks and property developers.

The Shanghai Composite closed at 3,070.59 yesterday. Stocks on the index trade at 34 times earnings, almost triple last year's November low of 12.9 times.

Li Jianfeng, a strategist at Shanghai Securities Co, said equity valuations already reflect the recovery in the economy and profits.

"The improvements in the economy and corporate earnings have been adequately priced in and are unlikely to provide the catalysts for a major rally," Li said in a telephone interview from Shanghai.

Growth to slow

China's growth will slow in the middle of 2010 as its stimulus package fades and weaker US consumer demand fails to support an export-led recovery, said Stephen Roach, chairman of Morgan Stanley Asia, in Washington on Tuesday.

China cannot count on a surge in exports to sustain growth kickstarted by its stimulus package "because external demand - courtesy of what is likely to be a multiyear shakeout due to the overextension of American consumer - is not going to come back", Roach, who is based in Hong Kong, said at the Council on Foreign Relations in Washington.

An index tracking financial stocks on the CSI 300 Index has gained 9 percent in the past month, making it the best performer among the 10 industry groups. Ping An Insurance Group Co, China's second-biggest insurer, has jumped 15 percent in that period and more than doubled this year. The shares closed down 1.5 percent to 58 yuan yesterday.

Poly Real Estate Group Co, the country's second-largest developer by market value, has rallied 14 percent in the past month. The company said on Oct 15 property sales for the first nine months rose 165 percent. Poly was down 0.65 percent to close at 27.69 yuan, after a nine-day rally that was its longest since January 2007.