24 October 2016
China is expected to increase funding for military equipment, and this could benefit related companies. Photo: Reuters
China is expected to increase funding for military equipment, and this could benefit related companies. Photo: Reuters

Market set to rally before economic work conference

The Shanghai Composite Index lost 12 points to close at 3,635 points on Thursday.

The military sector moved abnormally in afternoon trading, and the authorities unveiled military reforms after the market close.

The market is likely to end range-bound next week, with the Central Economic Work Conference stirring up more market speculation.

Market turnover in Shanghai and Shenzhen hit 1.1 trillion yuan (US$172 billion) on Thursday amid upbeat investor sentiment. Previously, the market lacked clear direction with the benchmark hovering around 3,600 points over the past three weeks.

President Xi Jinping announced various reform measures at a meeting of the Central Military Commission (CMC), including repeating a September pledge to cut troop numbers by 300,000 and establishing a joint operational command structure, according to a document released by the official Xinhua News Agency.

Also, a new discipline inspection commission will be established within the CMC and disciplinary inspectors will be sent to CMC departments and zone commands. The CMC will have an audit office and a political and legal affairs commission.

Relevant stocks surged even before the announcement. Fengfan Stock (600482.CN) jumped 7.7 percent, while Lucky Film Co. (600135.CN) and Linyun Industrial Corp. (600480.CN) surged more than 5 percent.

However, it remains unclear how the measures will benefit the military-affiliated companies. Investors seem to have extremely high expectations about the initiatives.

It’s believed that more resources will be deployed to improve military equipment, which could benefit related companies.

Xi also said the military must resolutely terminate all paid services. How will that affect companies that provide military and civilian goods?

The nation’s top leaders will convene the 2016 Central Economic Work Conference in early or mid-December. The meeting will set out the government’s guiding economic policies for next year.

Last year the conference outlined five major tasks for 2015, such as keeping economic growth and policies steady and adapting to the “new normal” of slower pace but higher quality of growth.

This time, the upcoming conference may not offer any surprise. However, the stock market is likely to rally amid positive expectations. And it might correct again after the meeting ends.

Authorities are also stepping up oversight on brokerages. Some of them disclosed that they had been asked not to offer financing to their customers through off-market derivatives.

That business is reportedly worth tens of billions of yuan. The prohibition could have a significant impact on local brokerages.

Leading brokerages like CITIC Securities (600030.CN), China Merchants Securities (600999.CN) and Everbright Securities (601788.CN) are involved in the business.

And that’s one reason why brokerage stocks slumped on Thursday. The three lost over 1 percent.

Nevertheless, improving market sentiment is set to boost their earnings.

This article appeared in the Hong Kong Economic Journal on Nov. 27.

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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