China is likely to take a pause in interest rate cuts and focus instead on lowering the bank reserve requirements in the near future in a bid to boost liquidity in the system.
The reserve requirement ratio (RRR) could be brought down to below 15 percent from current 19.5 percent within this year.
Meanwhile, the rate reduction could be capped at 50 or 75 basis points this year. Lower rates will help mitigate debt burden for corporates and alleviate banks’ bad loans problem, while a weaker renminbi will enhance the competitiveness of Chinese exporters.
Mainland insurance plays will be among those benefiting from the expected developments, which would make their wealth management products that place heavier bets on stocks and bonds more attractive. The whole sector will also benefit from the national pension policy.
Ping An Insurance Group Co. of China (02318.HK), China Life Insurance (02628.HK) and PICC Property & Casualty Co. (02328.HK) are set to perform well.
As for mainland banks, the rate cut will narrow their interest rate margin while mitigating bad debt. Entities that pay around 4 percent dividend will be good choices given diminishing worries about local government debt.
The property sector will be the biggest beneficiary of the rate cut. As the government is keen to stabilize housing prices, there will be industry consolidation and positive competition in the sector.
However, share prices of developers may be weighed down after a temporary rebound, given some adverse macro factors which include a weaker currency.
Meanwhile, small- and medium-sized companies may be able to improve their operations following several rate cuts and other monetary easing moves. Consumer-related firms, in particular those that deal with daily necessities, will benefit from rising wages among the lower social classes and cooling inflation.
Monetary easing is set to be a big theme for the market this year. And local governments are being given more resources right now, coupled with the interest rate and RRR cuts. That would leave more room for market speculation and offer more liquidity as well.
And Beijing is also happy to see a healthy bull market developing step by step, and maintain a diversified range of market themes.
The first two weeks of the annual “two sessions” will be a prime time for policy-driven speculative activities. Against this backdrop, high-speed railway and infrastructure stocks appear attractive in terms of valuations, considering Beijing’s big strategy of “One Belt, One Road”.
The two sessions refer to the annual meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), when leaders are expected to lay out the policy goals for the coming year.
The CPPCC opened its session on Tuesday, while the NPC — China’s top legislative body — will begin its meeting on Thursday.
The planned merger of China CSR Corp. (01766.HK) and China CNR Ltd. (06199.HK) offers a typical example of how Beijing seeks to offset deflation pressure through boosting infrastructure investment.
Environmental protection sector will be another interesting area. Chai Jing, a former state TV reporter, worked on hard-hitting features about China’s environmental woes. And there are a bunch of so-called “Chai Jing stocks”, including photovoltaics, nuclear and new energy plays. These stocks are expected to shine during the so-called two sessions.
And industry reforms envisaged under the 13th Five-Year Plan, which will cover the period 2016 to 2020, and free-trade zone plays will also become a heated topic in the market. Therefore, investors should watch more closely on policy changes and technical trends of individual stocks.
Last year, the market was left disappointed after high expectations ahead of the two sessions. The disappointment led to stocks in both mainland and Hong Kong markets getting battered.
However, the policy theme may work this year, given the anti-graft crackdown and management reshuffles at some government agencies and central state-owned companies.
The corruption fight has disappointed some vested interest groups, but it would help redistribute the wealth and let ordinary citizens participate in the nation’s economic growth.
All this will serve as a fresh trigger for speculative interest in the market after the previous bout caused by monetary easing last November.
This article appeared in the Hong Kong Economic Journal on March 3.
Translation by Julie Zhu
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