China stocks set for 12% drop in 2016 but is the worst over?

Chinese stocks were little changed on the last trading day of 2016 on Friday but the blue-chip index looked set to the end the year with a loss of 12 per cent despite surprising signs of resilience in the world's second-largest economy.

Chinese shares spent most of the year clawing back from a brutal January, sparked in part by fears of a hard landing for the economy.

They eventually rebounded 17 per cent from their February trough, giving some investors hope that the market has found its feet after last year's crash.

Both the CSI300 index and the Shanghai Composite Index rose 0.1 per cent by the lunch break on Friday, to 3,301.42 points and 3,098.31 points, respectively.

But they looked set to end the year as the world's worst performing major indexes. In contrast, both the S&P 500 index and the Dow Jones Industrial Average, the US benchmarks, were up over 10 per cent.

Still, in the eyes of many investors, Chinese stocks have turned the corner.

"2016 is a year of recovery, for both the market and China's economy," said Shen Weizheng, a Shanghai-based fund manager at Ivy Capital.

China's economy has performed better than many analysts expected this year, thanks to generous government stimulus in the form of record bank lending and increased infrastructure investment.

A housing boom has generated additional momentum and fuelled sharp price rises for materials from cement to steel, boosting earnings for the manufacturing and mining sectors.

But in the final months of the year, investor sentiment turned more cautious as Beijing stepped up efforts to control a mountain of debt, reining in riskier investments and targeting asset price bubbles.

A red hot housing rally and investment are also showing signs of fatigue after a year-long rally, though most markets watchers expect only a mild correction in housing prices, not a full-blown collapse.

"The concern is that China's stimulus-led recovery is not sustainable," Ivy Capital's Shen said, also flagging other risks such a recent selloff in China's bond market and potential protectionist trade policies from US President-elect Donald Trump.

In 2016, nearly all sectors retreated. But consumer staples shares advanced 8.4 per cent after index heavyweight Kweichow Moutai Co Ltd and Wulianggye Yibin Co Ltd gained around 53 per cent and 26 per cent, respectively.

Energy and raw materials stocks steadied, helped by Beijing's moves to cut excessive capacity in coal and steel industries, which along with the construction boom helped to spur higher resources prices.

Hong Kong

Hong Kong stocks were set to rise for a third day on Friday despite Wall Street weakness, but the benchmark index was on track to end the year roughly unchanged.

Both the Hang Seng index and the Hong Kong China Enterprises Index gained one per cent, to 22,003.64 and 9,409.98, respectively.

All sectors in Hong Kong gained ground, with services sector the best performer, up around 1.6 per cent at the midday.