20 October 2018
China is transforming its economy into one driven by domestic demand and dominated by the service industry. Photo: CNSA
China is transforming its economy into one driven by domestic demand and dominated by the service industry. Photo: CNSA

Seize opportunities from mainland reforms

Despite experiencing turbulence in the middle of the year, as of Dec. 17, the Shanghai Composite Index has recorded a 10 percent increase since the beginning of the year.

However, investors are cautious about the coming year.

As the year-end approaches, there’s no clear trend in the mainland stock market. With the government bent on achieving an economic growth of at least 6.5 percent in the coming years, the People’s Bank of China has cut interest rate six times since November 2014. More cuts in the benchmark rate and reserve requirement ratio are on the way. The loose monetary policy will support the stock market.

With the transformation of the export and manufacturing-led economy into one driven by domestic demand and dominated by the service industry, the old economy sectors underperformed this year while consumer-related sectors fueled the market.

Meanwhile, China launched a fresh round of reforms in state-owned enterprises to attract private money and improve the efficiency of SOEs. The government hopes to cut the number of SOEs from 112 to 40.

This means large-scale restructuring will happen among SOEs. In five years, over 7 trillion yuan (US$1.08 trillion) worth of state-owned assets will go public, benefiting mainland and Hong Kong stock markets and investors.

Significant developments in Chinese capital market will also boost the stock market. Inclusion of the renminbi into the International Monetary Fund’s special drawing rights basket will in the long run promote the internationalization of the Chinese currency and boost capital inflow into the A-share market.

The potential inclusion of A shares in the MSCI indices will also be a catalyst. We expect investor structure to be more diversified after the inclusion, changing the mainland market that is currently dominated by individual investors. With the entry of more institutional investors, the quality of investors in the A-share market will largely improve.

In the global economy, the US Federal Reserve finally announced the long-awaited interest rate rise, ending nearly a decade of zero interest rates. Although the rate increase may exert some downward pressure on the market, the pace of further rate increases is expected to be slow. In the meantime, the European and Japanese central banks are maintaining their monetary policy easing. It is almost certain ample liquidity will remain in the market in 2016.

Amid uncertainties in the market, investors are advised to adopt bottom-up and “select stocks rather than markets” strategies. Valuations in the Hong Kong and mainland markets are attractive. But cheap doesn’t mean valuable. Investors should always focus on a company’s fundamentals.

If investors follow the national strategies, it won’t be hard for them to find long-term investment opportunities in the mainland stock market.

This article appeared in the Hong Kong Economic Journal on Dec. 23.

Translation by Myssie You

[Chinese version中文版]

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Managing director of retail division at Value Partner

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