26 October 2016
Any sharp decline in Ping An Insurance is a good opportunity to buy the stock in view of its strong earnings outlook. Photo: Bloomberg
Any sharp decline in Ping An Insurance is a good opportunity to buy the stock in view of its strong earnings outlook. Photo: Bloomberg

VAT expansion plan weighs on banking plays

Technology stocks suffered a massive sell-off on Thursday. They included stocks related to media, entertainment, e-commerce, electronic payment and information security.

Financial software firm Hundsun Technologies (600570.CN) tumbled the daily down limit while accounting and human resources software provider Yongyou Network Technology (600588.CN) slumped 7.7 percent.

Earlier in the week, Beijing announced plans to scrap a rule that caps lending by commercial banks at 75 percent of their deposits. However, banking stocks failed to rebound.

China Minsheng Banking Corp. (600016.CN) dropped 4.2 percent while China Everbright Bank (601818.CN) and China CITIC Bank (601998.CN) both lost over 3 percent.

Their disappointing performance may be traced to the government’s plan to expand a pilot program replacing turnover tax with value-added tax to cover financial services, property and other sectors.

Details of the proposal are expected to be unveiled within two weeks.

Highly profitable sectors might face higher tax costs as a result of the reform.

The nation’s top three telecommunication carriers have reported higher tax payments following the launch of the program. Thus, investors fear Chinese banks would also suffer.

Some investors tried bottom-fishing following deep corrections in recent days. However, the market tumbled even more.

The market is not that gloomy in terms of government policy. The People’s Bank of China auctioned 35 billion yuan (US$5.63 billion) of seven-day reverse repurchase agreements at 2.7 percent, much lower than the previous 3.35 percent.

The central bank has halted its open market operations 19 times and injected a net fund of 35 billion yuan into the market this week.

However, the positive move has failed to bolster the equity market, which continued its decline on Thursday.

It remains unclear whether the market has already touched the bottom. The market rally may resume and last longer if monetary easing measures remain in place.

The scrapping of the loan-to-deposit ratio and the reverse repo sales show that Beijing will continue to adopt a loose monetary policy. It is also likely to try new tools given that all its previous measures have made limited progress.

I’m convinced the bull market cycle of A shares remains intact.

Investors should take advantage of the deep corrections to collect quality stocks.

Ping An Insurance Group Co. of China (601318.CN) has fallen back, although its investment income jumped 110 percent in the first quarter from the year earlier.

Senior company officials have hinted that second-quarter earnings would be even better.

According to market rumors, the insurance company plans to spin off its internet finance unit for a separate listing. Any sharp decline in the stock would be a good buying opportunity in light of its strong earnings outlook.

It’s quite easy to reap over 30 percent return in the first half. However, investors have to be more selective as the market gets more volatile.

They can hold financial plays with earnings support, and collect some quality stocks during each of deep correction.

This article appeared in the Hong Kong Economic Journal on June 26.

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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