28 October 2016
BoComm aims to become the first Chinese state lender to move toward genuine mixed-ownership. Photo; Bloomberg
BoComm aims to become the first Chinese state lender to move toward genuine mixed-ownership. Photo; Bloomberg

Why China stocks will need more policy support

Bank of Communications (BoComm; 03328.HK, 601328.CN) has become China’s first state-owned lender to kick off a long-awaited ownership reform in the sector.

The bank said the reform plan, which has been approved by the State Council, includes optimizing its ownership structure through the introduction of private shareholders, improving its internal administration system to strengthen risk control and employee stock ownership plan.

The news has sparked great speculation about the bank’s future moves, in particular the possible spin-off of its various units such as wealth management, credit card, private banking, trust, fund companies.

BoComm already has a relatively diversified ownership structure compared to other mainland banks. But the lender now needs to deepen the reform by boosting the private shareholding and move to genuine “mixed ownership”.

A spin-off of some units may provide one-off boost for asset valuations, but what’s more important for the bank is how to improve operational efficiency and management in the long run.

The market, meanwhile, has been focused more on short-term speculative activities in the sector. That explains why financial plays led a rebound in A-shares on Wednesday.

Analysts believe the stock market will hold up only if the banking sector does well, given the sector’s huge market capitalization. 

The mainland markets have partially been driven by reform expectations. Besides banks, several state-owned enterprises with reform potential also touched the daily up-limit Wednesday.

The list includes SDIC Xinji Energy (601918.CN), SDIC Power Holdings (600886.CN), COFCO Tunhe (600737.CN) and Luoyang Glass (600876.CN).

Also, railway plays are becoming more attractive after going through deep corrections. These stocks will benefit from accelerated domestic railway projects and overseas projects under the “One Belt One Road” strategy.

China Railway Group (601390.CN), China Railway Erju (600528.CN) and CRRC Corp (601766.CN) rebounded more than 4 percent Wednesday.

In order to maintain the momentum in the stock market, policymakers have to unveil a stream of policy incentives.

At a recent State Council meeting, Premier Li Keqiang laid out a three-year action plan related to a new urbanization drive. The plan includes rebuilding 18 million houses in shanty towns and constructing 10.6 million units in rural areas.

All these policies are nothing new and have already been mentioned in previous meetings. However, Beijing has iterated its support for various infrastructure investments, which should help shore up investor confidence in relevant stocks.

A-shares remain very strong despite some corrections recently. The prospects of the Shanghai market hitting new highs will largely depend on liquidity support.

Total market turnover in Shanghai and Shenzhen declined to 1.53 trillion yuan on Wednesday. 

As the market awaits further leads, the Shanghai benchmark index could hover around the 5,100 points mark in the near term.

This article appeared in the Hong Kong Economic Journal on June 18.

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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