The 2016 National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) meetings will be held in Beijing in about two weeks.
The events will naturally set off renewed speculation in the stock market about potential policy initiatives and the industries that can benefit from increased government support.
Environmental protection and state-owned enterprises reform have been favorite themes for investors in recent years.
I believe the meetings this year will see further discussions on the topics. Meanwhile, the most urgent and important job is reform in supply side and industrial upgrade.
The economy will gain full power only when “reform” and “transformation” are both completed.
Supply side reform involves sectors like iron and steel, cement, coal, and real estate which are struggling with high inventory. Investors are unwilling to allot resources for new projects.
To drive growth in private sector investment, the first thing to do is destocking.
Of course, the reform will take time.
Real estate market will be a key because it can drive the development of industries like iron and steel and cement if it can successfully solve the destocking problem.
In the past year, the government launched many policies to support the real estate sector. Expected additional monetary policy easing this year will further support the industry.
In the meantime, investors are more pessimistic about reforms in the coal industry. Oil price slide will drag down the prices of all energy commodities, spurring China to boost the development of clean energies.
The reform in this industry can only be done by closing small coal production plants. A decline in earnings for mid- or big producers is inevitable.
New economy is also among the central government’s focus areas.
Recently, authorities released many measures to support industrial upgrade and the development of information technology. In the coming five years, high-tech companies will continue being under the spotlight.
Speculation around SOE reform in the stock market once pushed the mainland stock index to a peak level in the last year, but share prices underwent deep correction later.
Expectation for reforms can only bring short-term speculative opportunities, instead of providing long-term growth points.
Speculation about the meeting topics usually doesn’t last long. Correction will happen after the end of the meetings.
Given this situation, investors should be prepared with more flexible strategies. Select companies will good fundamentals will provide higher safety margin.
This article appeared in the Hong Kong Economic Journal on Feb. 19.
Translation by Myssie You
[Chinese version 中文版]
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