Monetary easing is widely considered as the new norm in mainland China as economic planners try to beat deflation and avert the risk of hard landing.
However, the measure may have limited impact on the real economy, as we can see from the effect of years of monetary easing on global economic recovery. The United States has managed to stand out thanks to the dollar being the global reserve currency.
China has cut interest rates and expanded lending, but the efforts have yet to pay off. The main problem is that the incremental capital has so far failed to flow into real economy. In order to tackle the issue, Beijing has been pressing ahead with the “one belt, one road” strategy and ramping up investment in high-speed railway, nuclear power and other infrastructure projects.
Therefore, infrastructure and related sectors are likely to benefit from policy support in the coming months.
It remains unclear whether A shares will sustain their rally this year. Investors who place bets on A-share ETFs like CSOP A50 (02822.HK), X iShares A50 (02823.HK) and X WiseCSI300ETF (02827.HK) will get stable returns, and those who invest through the Shanghai-Hong Stock Connect may obtain even higher returns.
However, it’s unclear whether foreign investors will buy into the A-share market rally, which may lead to the Shanghai Composite Index and the Hang Seng China Enterprises Index outperforming the Hang Seng Index again as they did in 2006 and 2007.
The market has widely expected the Stock Connect to considerably narrow the price gap of dual-listed shares. However, the market has gone in the opposite direction. A shares have posted whopping gains because of policy support and speculative retail investors, but the Hang Seng China Enterprises Index has deviated from the A-share market.
Investors should wait for market correction to increase holdings in banking and insurance plays, like ICBC (01398.HK), Agricultural Bank of China Ltd. (01288.HK), Ping An Insurance (Group) Co. of China Ltd. (02318.HK) and China Life Insurance Co. Ltd. (02628.HK).
Internet and software stocks should outperform the overall market in anticipation of new policy incentives for the sector. Some shell stocks and laggard sectors like Macau gaming may also see some uptick.
Investors should also take advantage of corrections in some SOE plays that have been hurt as Beijing pursues its anti-graft fight. We’ve seen that these state-owned enterprises won’t go bankrupt, and the new management teams will adopt a more efficient approach.
Meanwhile, there are some subsidiaries that act as little coffers for SOEs, enabling vested interest groups to inject good assets into these subsidiaries to seek personal benefits. These subsidiaries like Kunlun Energy (00135.HK) have lost their shine amid management reshuffles. Investors should avoid these companies.
The anti-corruption campaign will benefit the country’s long-term development, although it will cause some pain in the short term. However, ordinary investors may struggle to understand complicated interest groups on the mainland.
This article appeared in the Hong Kong Economic Journal on Feb. 17.
Translation by Julie Zhu
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