28 October 2016
Transferring excess supply into public housing will benefit property developers as well as the Chinese government. Photo: Xinhua
Transferring excess supply into public housing will benefit property developers as well as the Chinese government. Photo: Xinhua

China markets: What should investors focus on now?

Weak November trade figures have led to accelerated capital outflow from China and sparked a fresh slide in the renminbi in offshore trade. The equity market also suffered, with the Shanghai Composite Index falling 1.89 percent to close at 3,470 points on Tuesday.

Investors are waiting for some leads from the Central Economic Work Conference.

Poor economic data is a key drag for the stock market. China’s foreign trade dropped by 7.8 percent to 22.08 trillion yuan in the first 11 months of this year compared to the same period in 2014. Exports declined by 2.2 percent to 12.71 trillion yuan, while imports slumped by 14.4 percent to 9.37 trillion yuan.

In November, the nation’s exports and imports posted declines of 3.7 percent and 5.6 percent respectively in yuan terms.

Exports have declined more in November after a 3.6 percent drop in October. This reflects weak external demand. China’s manufacturing, shipping and logistics sectors are still grappling with sluggish demand, while Beijing’s promotion of high-end manufacturing has yet to yield results.

Weak trade data coupled with looming Fed liftoff have plunged the yuan to a three-month low. The redback tumbled to around 6.49 against the US dollar, off over 200 basis points from the previous trading session.

Authorities have repeatedly stressed that they see no basis for long-term depreciation of the currency. Despite the comments, the unit has continued to fall in the market.

If the trend continues, investors will withdraw more capital from China, leading to negative pressure on the stock market.

China has to rely on domestic demand and reform to stimulate growth. At the Central Economic Work Conference, Beijing will spell out its plans for next year. That has led a guessing game among investors.

It’s believed that President Xi Jinping will unveil four key tasks at the meeting, namely tackling overcapacity, reducing costs for real-economy companies, drawing down housing inventory, and preventing financial risks. 

Various measures for resolving excessive housing inventory have, in fact, already been unveiled in the recent past. The sector could see more supportive policies next year.

Premier Li Keqiang said in the government work report early this year that the government intends to transfer some excessive housing inventory into public housing units. The move will help alleviate the problems of small and medium property developers and avert a wave of bankruptcies.

Cutting prices might be the most effective way to clear housing inventory. However, Beijing would not want a housing price slump as it would affect land prices as well as local government revenues.

Transferring oversupply into public housing can achieve multiple goals. Companies can sell their inventory to government at cost, which would ease the financial burden for developers while helping the government save time and resources in development of social housing.

Meanwhile, developers will also benefit from further monetary easing measures, helping leading players in the sector to continue to outperform next year.

Brokerages have recommended leading firms such as Poly Real Estate Group (600048.CN), China Vanke Co. (000002.CN) and China Merchants Property Development (000024.CN) for December.

During the first quarter of next year, investors can switch to regional plays such as China Fortune Land Development (600340.CN), Beijing Capital Development (600376.CN), Shanghai Jinqiao Export Processing Zone Development (600639.CN) and Shanghai Lujiazui Finance & Trade Zone Development (600663.CN).

Elsewhere, China Metallurgical Group will be merged into Minmetals as a wholly-owned subsidiary, according to a statement Tuesday from China’s State-owned Assets Supervision and Administration Commission.

The listed subsidiaries of both companies have potential for further consolidation.

Investors should keep an eye on Metallurgical Corp of China (601618.CN), Huludao Zinc Industry (000751.CN), Minmetals Development (600058.CN), Kingray New Materials Science & Technology (600390.CN) and Zhuzhou Smelter Group (600961.CN).

This article appeared in the Hong Kong Economic Journal on Dec. 9.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]


a columnist at the Hong Kong Economic Journal

EJI Weekly Newsletter