China’s equity market has been mainly driven by policy rather than company fundamentals.
Premier Li Keqiang recently laid out the future policy direction while the central government and local authorities are set to roll out more support measures for online shopping.
Investors should take note of this trend.
Another interesting area is power reform.
China will open the power distribution and retail sectors to private companies.
And it will encourage competition among power-generation companies and electricity retailers, allowing the market to determine energy prices.
Also, the government will extend medium and long-term electricity trading from regions with excess power to those experiencing shortages.
However, the reform has not been received well by market observers.
Some say private companies will have an insignificant presence in the sector due to their limited resources and policy restrictions even after reform.
Traditional grid companies will continue to enjoy substantial advantages which would benefit related stocks this week.
Meanwhile, the market has been rife with rumors that China is about to expand a pilot reform to replace business tax with value-added tax (VAT) to the construction, real estate, finance and life services sectors.
These came with reports that VAT for the construction and real estate sectors will be set at 11 percent and that for finance, insurance and life services sectors will be 6 percent.
Tax reform will benefit companies that have low profitability. Highly profitable companies might end up paying more taxes.
China Mobile (000941.CN) recently reported earnings below market expectations, partly due to the effects of tax reform.
Financial and property plays, which are in the highly profitable column, might grapple with the same issues and trigger a broad market correction.
Market hype about financial plays will continue until the government formally announces tax reform.
Its recent decision to allow local governments to swap existing high-interest debt for lower-cost bonds will benefit mainland banks.
Also, the China Securities Regulatory Commission has said it may allow banks to apply for brokerage licenses, although no time line has been given.
Officials from the National Development and Reform Commission (NDRC) told a business forum that the government will focus on stimulating economic growth this year.
In addition to its “One Belt, One Road” strategy, the Beijing-Tianjin-Hebei economic zone and Yangtze River Economic Belt, the government will step up efforts to encourage innovation and expand trade in goods and services to create a new growth engine for the economy.
Beijing has been promoting a public-private partnership (PPP) model to finance these ambitious projects instead of relying on credit expansion to drive investment.
The government has been trying to attract private investors to participate in these projects.
However, private investors have shown little interest to high financing costs and low investment returns.
Eligible PPP projects are allowed to extend loan maturities to as long as 30 years with preferential interest rate, according to the NDRC.
The move will help fund these projects and benefit the construction materials sector.
This article appeared in the Hong Kong Economic Journal on March 23.
Translation by Julie Zhu
[Chinese version 中文版]
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