The fifth plenary session of the 18th Central Committee of the Communist Party of China began today.
As the People’s Bank of China (PBoC) “turned on the tap” on Friday night, the market has become more positive and the stock market index may hit a new short-term high.
The PBoC announced its decision to cut both the reference rate and the reserve requirement ratio (RRR) on Friday. According to estimates, the move will release 700 billion to 900 billion yuan (US$110-141 billion) capital into the market.
China’s economic data set for the third quarter was disappointing. However, the central bank’s announcement was a surprise to the market who expected such a move to come later.
It is believed that the timing was to avoid further economic decline in the fourth quarter and boost market sentiment for the top party meeting.
Last Wednesday, the Shanghai Composite Index fell 3 percent, but rebounded in the following two days.
Transaction volume is going up steadily. Combined transaction volume in the Shenzhen and Shanghai stock markets was over one trillion yuan, supporting the index to stay above 3,400 points.
Industry insiders expect the index to reach 3,800 as market sentiment improves.
However, how the RRR and interest rate cuts will affect the mainland banking sector remains uncertain.
The smaller margin between Chinese banks’ lending and deposit rates is negative but increased quota for credit is positive.
The PBoC also scrapped a ceiling on deposit rates, creating bigger challenges for banks to compete in a more market-oriented arena.
In the first half, the negative influence from the smaller margin was larger than the gains from the increased lending, leading to slower profit growth for the banks.
We have to wait and see whether the situation will be reversed in the second half.
Based on the situation in the first half, the real estate sector benefits the most from the RRR and interest rate cuts.
Home prices bottomed out in many places amid the monetary easing. Data suggests that the growth rate of home prices slightly slowed recently. The new stimulus is expected to boost a new round of growth in the sector.
Besides, investors may continue to look for opportunities around the 13th Five-Year Plan concept such as stocks related to environmental protection and information technology.
With the anticipated acceleration of economic growth, demand may increase in the retail, healthcare and education sectors.
Currently, stocks related to environmental protection are at a short-term peak and likely to face correction. Healthcare and retail sectors may be the next targets for speculators.
Large funds have invested in healthcare and pharmaceutical companies — Ginwa Enterprise (Group) Inc. (600080.SH), Henan Lingrui Pharmaceutical Co. Ltd. (600285.SH), Joincare Pharmaceutical Group Industry Co. Ltd. (600380.SH), Zhangzhou Pientzehuang Pharmaceutical Co. Ltd. (600436.SH), Hubei Jumpcan Pharmaceutical Co. Ltd. (600566.SH) — all reached their daily 10 percent up limit last Friday.
Investors may consider buying these companies because the speculation may continue and more favorable policies are likely to come out this week.
This article appeared in the Hong Kong Economic Journal on Oct. 26.
Translation by Myssie You
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