China’s GDP growth is likely to moderate to below 7 percent in the first quarter of this year, which would pave the way for further monetary easing. And Beijing’s push of the “One Belt One Road” strategy and new infrastructure projects could also fuel further gains in the A-share market.
Meanwhile, reform of state-owned enterprises (SOEs) will be another investment theme playing out.
The industries that Beijing vows to support are mostly yet to adapt to free market competition. These firms carry various “historical burdens” and are also grappling with structural issues.
The central government has confirmed a grand plan to merge and consolidate the SOEs. However, all the complex issues may not be fixed in the short term. Therefore, some supportive measures will be launched to help the firms maintain their operations as they gear up for longer-term reforms.
Prior to any potential consolidation, policy incentives will help lure potential investors. Consolidation moves in high-speed railway, telecom and power sectors will provide some one-off boost for these sectors, which will be good targets for short and medium-term investments.
In the meantime, Beijing has lent some support for those old-economy sectors which are struggling due to the economic slowdown.
For example, the property sector has long been considered as an engine underpinning mainland economic growth and a hotbed for speculation and investment. In last couple of years, the central government has been curbing the red-hot sector, and an industry shake-up is under way.
A number of property developers who are financially strained are on the verge of bankruptcy or targeted by bigger players. New-home prices declined in 66 of the 70 cities tracked by China’s government last month. The consolidation in the sector is expected to continue.
The central government is happy to see continued fund inflow into the stock market. However, local governments have done very little to offset revenue loss from land sales. The central government had recently cut interest rates and relaxed mortgage rules for the housing provident fund. The moves are aimed at spurring inelastic housing demand.
These measures may give some short-term boost for property plays. However, Beijing has no intention of driving up property prices further to bolster economic growth. Given these various factors, mainland property stocks may post some rebound until the industry shake-up is complete.
Investors could place some short-term bets on China Overseas Land & Investment (00688.HK), China Resources Land (01109.HK) and Shimao Property Holdings (00813.HK).
China’s Asian Infrastructure Investment Bank has lured in a number of US allies, and Beijing has won a good battle. That would pave the way for internationalizing the Chinese currency and helping the unit play a bigger role in the global financial arena in the future.
Expectation of more details on the “One Belt One Road” strategy has pushed up infrastructure and railway plays recently. These stocks are the biggest beneficiaries in the short term.
In the long run, trading and transport plays would benefit as well. Huge amount of capital is set to enter the relevant plays; so, investors will have to act ahead of the broad market.
China’s big banks will report their 2014 earnings this week. The market has already factored in some negative news, going by the share price of China Merchants Bank (03968.HK).
This article appeared in the Hong Kong Economic Journal on March 24.
Translation by Julie Zhu
[Chinese version 中文版]
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