Why it may be time for fresh bets on China infrastructure stocks

September 07, 2015 15:41
To bolster investor confidence, Chinese authorities are expected to announce new infrastructure projects under the public-private partnership model. Photo: Reuters

Zhou Xiaochuan, the head of the People's Bank of China, said at a G-20 gathering that the renminbi has stabilized after the recent sharp devaluation, and that the correction in the nation's stock market is almost done.

The remarks were aimed at mitigating concerns among global investors about slowing Chinese growth.

It's quite interesting that a central bank chief would conclude that the market rout is coming to an end. That is unimaginable in free economies like Hong Kong, where everything is determined by the market.

In China, the government has actively intervened in the equity market. Given the state's dominant role, will investors buy into the conclusion that the markets are now set to stabilize?

Leverage has dropped significantly since the market rout, which has yet to have any significant impact on the real economy, Zhou said. There is no change in China’s economic fundamentals, he said, adding that there is no basis for long-term yuan depreciation.

There may be some merit in the argument that financial markets will become less volatile.

In fact, some state-owned long-term funds, such as pension fund, may have already started buying stocks. The Shanghai Composite Index has found solid support at around 3,000 points. Besides banking plays, some good small and mid-cap stocks are also being bought. This marks a change from the earlier approach of broad-based buying by China Securities Finance Co.

It’s quite likely that more long-term funds have joined the so-called national team to prop up equity prices. Stocks that are supported by these funds will have limited downside. 

The safest path for A-share investors is to follow the "national team" and focus on heavyweight financial stocks and quality companies with good earnings.

China's stock market may find a floor with support from the state institutions. But the real economic growth is still worrying.

Finance Minister Lou Jiwei suggested at the same G-20 gathering that China won't resort to massive fiscal stimulus to spur growth, given that such approach resulted in massive overcapacity and huge inventory build-up in some industries.

China will continue to go through a painful economic restructuring stage in next five years, Lu said, but added that economic growth would stay at around 7 percent.

China resorted to massive leveraging to stimulate growth between 2009 and 2010 after the financial crisis, and achieved 10 percent annual growth. The nation contributed over half of global economic growth.

While the Chinese economy has now slowed to 7 percent amid deleveraging moves, it still contributes 30 percent of global growth, Lou added.

Beijing has tried to send a clear message from the G20 meeting that global investors should not over-react to China’s growth slowdown. 

The Shanghai Composite Index fell 2.23 percent last week, marking the third week of straight losses. But the decline was less severe than previous two weeks. State institutions and funds continue to support the market, but retail investor sentiment is yet to recover.

To bolster investor confidence, Beijing has unveiled various policy incentives apart from injecting huge liquidity into the market. In particular, it has announced several infrastructure projects.

And the government will soon announce a new batch of public-private partnership (PPP) infrastructure projects, in fields such as sewage, transport and public utilities.

Given this, infrastructure stocks offer good prospects for long-term investors.

This article appeared in the Hong Kong Economic Journal on Sept. 7.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal