24 May 2019
Coal producer Shenhua Group is said to be in merger talks with power firm China Guodian. Photo: Sina
Coal producer Shenhua Group is said to be in merger talks with power firm China Guodian. Photo: Sina

Why China’s A-shares may struggle going forward

Chen Yulu, deputy governor of the People’s Bank of China (PBoC), said early this month that China will pursue “neither loose nor tight” monetary policy to ensure basically stable liquidity.

The central bank wants to lead the financial institutions to return to their original role of supporting the real economy, Chen said, adding that he hopes companies will focus on their core businesses and stop seeking to blindly step into the financial sector.

Financial industry has close ties with real economy, and prolonged extra-low interest rates will lead to excessive and dramatic expansion of financial assets, Ji Min, deputy chief of the PBoC’s research bureau, has pointed out.

Given these concerns, financial deleveraging will continue and credit creation will moderate in the country.

Against such backdrop, the A-share markets are likely to be locked in a tight range going forward.

Industry restructuring is another key issue that investors should pay heed.

Official of the State-owned Assets Supervision and Administration Commission (SASAC) have said the government will push for state-owned enterprise (SOE) consolidation in steel, coal, heavy equipment sectors. Authorities aim to cut back the number of central SOEs to 100.

China’s largest coal miner Shenhua Group and major power producer Guodian Corp have said they are considering major organizational changes, prompting instant speculation in the market that the two firms could be headed for a merger.

A merger between Shenhua and Guodian will create a giant conglomerate with assets of 1.8 trillion yuan, surpassing firms like CRRC Corporation.

Currently, Shenhua is mainly engaged in coal mining, with business presence in power, railway, ports, shipping and coal chemical industries as well.

Guodian, meanwhile, focuses on electricity, coal, power equipment, new energy, transport, hi-tech, environmental protection, technical services, etc.

China’s coal industry is grappling with over-capacity and low industry concentration. At the same time, there are more central SOEs in the power sector compared with other sectors like steel. Hence, there is room for authorities to streamline the energy sector.

This article appeared in the Hong Kong Economic Journal on June 12

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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