China is likely to pause in cutting interest rates and focus instead on lowering bank reserve requirements in the near future in its efforts to boost liquidity in the economy.
The reserve requirement ratio (RRR) could be brought down to below 15 percent within the year from 19.5 percent.
Meanwhile, the reduction in interest rates could be capped at 50-75 basis points (0.5 to 0.75 percentage point) this year.
Lower rates will help mitigate the debt burden for firms and alleviate the problem of bad loans at banks, while the resulting 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 Ltd. (02318.HK), China Life Insurance Co. Ltd. (02628.HK) and PICC Property & Casualty Co. Ltd. (02328.HK) are set to perform well.
For mainland banks, the rate cuts will narrow their interest rate margins while mitigating bad debt. Banks that pay a dividend of about 4 percent will be good choices given diminishing worries about local government debt.
The property sector will be the biggest beneficiary of the rate cuts. 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 adverse macro factors including 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 cuts in interest rates and the RRR.
That will leave more room for market speculation and offer more liquidity as well.
Beijing is also happy to see a healthy bull market developing step by step and maintaining a diversified range of market themes.
The first two weeks of the annual “two sessions” in Beijing will be a prime time for policy-driven speculative activities.
The two sessions refer to the upcoming annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference, when leaders are expected to lay out the policy goals for the coming year.
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 planned merger of CSR Corp. Ltd. (01766.HK) and China CNR Ltd. (06199.HK) offers a typical example of how Beijing seeks to offset deflation pressures through boosting infrastructure investment.
The environmental protection sector will be another interesting area.
Chai Jing, a former state TV reporter, produced a widely watched, hard-hitting documentary about China’s environmental woes.
There are a bunch of “Chai Jing stocks”, including photovoltaics, nuclear energy and new energy plays, that are expected to shine during the two sessions.
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 hot topic in the market. Investors should watch closely the policy changes and technical trends of individual stocks.
Last year, the market was left disappointed after high expectations before the two sessions were not met. Stocks in the mainland and Hong Kong markets got battered.
However, the policy theme may work this year, given the antigraft crackdown and management reshuffles at some government agencies and central state-owned companies.
The corruption fight has disappointed some vested interest groups, but it will help redistribute wealth and let ordinary citizens participate in the country’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 in November.
This article appeared in the Hong Kong Economic Journal on March 3.
Translation by Julie Zhu.
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