The Morgan Stanley Capital International (MSCI) China Index may rebound in the near term because concern that the economy will slow is already priced into the shares after annual declines and as liquidity improves, JPMorgan Chase & Co said.

A decline in agricultural prices may give authorities more leeway to adjust monetary policy, while central bank cash injections and a release of locked-up funds from Agricultural Bank of China Ltd's initial public offering (IPO) will boost available funds, according to JPMorgan strategists led by Frank Li in a report on Tuesday.

"We believe that the market may have discounted some of the economic slowdown risks," Li, who is top-ranked for strategy in Institutional Investor's inaugural All-China research poll, said in the report.

The MSCI China Index measures mostly Hong Kong-traded Chinese companies.

It has declined 5.5 percent this year, as the government sought to restrain inflation and record property price gains.

The measure dropped 0.4 percent to 61.10 at 10:08 am and trades at 15.7 times reported earnings, compared with last year's high of about 22.6 times in December.

Still, JPMorgan remains "cautious" on the MSCI China because of the risk to earnings from an economic slowdown, policies including the new resource tax and price caps for coal companies, and as banks continue to raise funds, Li wrote.

Investors should favor consumer stocks, expressways, independent power producers, banks and insurers, and avoid commodities, property developers, paper manufacturers and airlines, according to the report.

Agricultural Bank of China Ltd, which begins trading in Shanghai on Thursday and in Hong Kong the day after, raised $19.2 billion in the world's biggest IPO in four years.

The release of money tied up in the share sale may be a possible near-term catalyst for the stock market, Li said.

The central bank injected as much as 517 billion yuan ($76.3 billion) in liquidity through open-market operations in June, compared with 224 billion yuan in May, and net withdrawals in April and March, according to the JPMorgan report. July net liquidity injection is likely to stay at around 500 billion yuan, the brokerage estimated.

"Authorities seem to have become more accommodative in improving the domestic liquidity situation, which marks a far cry from the government's earlier practice of aggressively taking liquidity out of the system," Li said.