Investors sit on sidelines, holding cash

The benchmark Shanghai Composite Index rose 0.16 percent to 2,109.47 points on Monday, reversing a losing streak over the previous three trading days, as investors moved to the sidelines waiting for a clearer vision of the economic front from the ongoing Party meeting.

Stock analysts said that they believe that the Third Plenary Session of the 18th Central Committee of the Communist Party of China will be "positive" for the stock market. But they added that they aren't ready to place any bets now, because it's too early to make any meaningful assessments on which sectors of the economy will be the most affected.[Special report]

"People are looking for indications and clues for reforms," said Catherine Yeung, a Hong Kong-based investment director at Fidelity Worldwide Investment.

"There are three scenarios that we can expect from the meeting," she added.

The first scenario is negative, where nothing is really said, which she said is unlikely to happen. The second is what most people have priced in — a framework for reform. And the third is that a clear timetable will be declared for reform in future.

Yeung said that she is expecting something between the second and third scenarios. Meanwhile, she doesn't think that the reform has been fully priced in.

"I do not think it is too late to buy," she said. There are several sectors that may have opportunities "ahead of expectations". Fidelity, she said, is "overweight" in sectors including information technology, healthcare, renewable energy, consumer products and media.

It's widely believed that the meeting will set a comprehensive framework for China's reform over the next few years, but a detailed roadmap is unlikely to be announced in the near future.

It will be difficult to get a sweeping overhaul of local government finances or the tax system, or a major breakthrough in land and State-owned enterprise reforms. However, this is no cause for panic, UBS AG said in a recent report.

"We do expect many reform measures to be initiated gradually over the next couple of years, including financial sector reform and service sector deregulation, while the more difficult ones may follow, " the UBS report said.

At the end of October, the benchmark Shanghai Composite Index surged 16.5 percent from a six-month low in late June, but it has shed about 2 percent since the beginning of November.

"The market seems to have reasonably low expectations — believing that deep reforms are difficult, and gradual and marginal changes have already been largely priced in," said Wang Tao, chief China economist at UBS.

If unexpected policies or decisions are introduced during the meeting, that will surprise the market, Wang added.

"Plans to establish and fund an explicit deposit insurance scheme in the immediate future and set up a crisis-resolution mechanism would suggest the government may move faster on full interest rate marketization than is currently being envisaged," Wang wrote in a note on Tuesday. "Measures to make banks write off bad loans more rapidly and raise capital more easily would also be a positive surprise."

Meanwhile, individual investors are more divided when it comes to evaluating the impact of the Party meeting. Some believe that share prices will increase, while others take it as a near-term neutral event.

"If we look at historical data, the benchmark SCI always fell slightly after the CPC Central Committee meeting. I dare not bet on any surge," said Qu Lao, an experienced individual investor based in Shanghai.