26 October 2016
China intends to build more than 8,000 kilometers of railway track by the end of the year. Photo: Bloomberg
China intends to build more than 8,000 kilometers of railway track by the end of the year. Photo: Bloomberg

Banking, infrastructure sectors remain under spotlight

The mainland stock market has undergone a correction recently, as the financial sector has been dragged down by sluggish economic growth.

However, new reform measures have become the source of speculation for certain stocks.

The State Council, China’s cabinet, released Monday a circular saying it will press ahead with reforms in the financial and power sectors.

It said the authorities will move further to liberalize the key interest rate and issue certificates of deposit to the public and institutions.

Also, regulators will gradually relax their grip on the deposit interest rate.

And financial institutions will be allowed to expand the scope of market-based pricing of their balance sheet.

Some banks will adopt a pilot scheme to issue certificates of deposit to individuals and companies.

It remains unclear how Chinese banks will tap into the new market space.

Also, the authorities reiterated the significance of a market-based exchange rate system and enhancing the two-way floating of exchange rate as well as cross-border usage of the Chinese currency.

China will further optimize Shanghai-Hong Kong Stock Connect, and Shenzhen-Hong Kong Stock Connect will be unveiled at a proper time.

The move would ramp up renminbi-denominated cross-border investment and boost the development of the mainland and Hong Kong equity markets.

Large brokerages will be the biggest beneficiary of the move.

Tax reform is another priority for the government this year.

The circular said the pilot program to replace the business tax with a value-added tax will be completed within the year and be extended to the construction, property, financial and service sectors.

The tax reform will have some impact on property stocks.

The central government intends to tackle various tax issues and restrictive measures to further unleash the growth momentum of the economy.

Local government debt is another urgent issue to be fixed.

Beijing has unveiled a 1 trillion yuan (US$160 billion) debt swap program to try to reduce interest costs for local governments.

Jiangsu province has sold all the 52.2 billion yuan of bonds it offered.

Of this, 30.8 billion yuan in bonds was issued to replace maturing ones.

The program will be kicked off in various parts of the country this year, which will also benefit banks, the biggest lenders to local governments.

Meanwhile, infrastructure continues to play a key role in driving the economy.

China Railway said fixed-assets investment in the country’s railways surged 22 percent to 132.1 billion yuan in the first four months of this year from the same period a year ago.

And China has spent 117.2 billion yuan on railway construction during the period, up 20 percent from the year before.

China plans to invest more than 800 billion yuan in railway construction and build more than 8,000 kilometers of track within the year.

Therefore, spending in the rail sector is likely to accelerate in the second half.

Investors should take advantage of market corrections in attractive plays such as China Railway Construction (601186.CN) and China Railway Erju (600528.CN).

This article appeared in the Hong Kong Economic Journal on May 19.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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