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Key reform objectives bring new content
May 13, 2013, Monday
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ON May 6 , Chinese Premier Li Keqiang hosted a State Council session, identifying nine key reform objectives for 2013.
The agendas identified are: 1) reduce administrative approval procedures; 2) reform the fiscal budgeting system; 3) gradually liberalize interest and exchange rates; 4) plan railway construction financing; 5) reform residential utilities pricing; 6) deepen healthcare reform; 7) improve urbanization quality, devise a longer-term urbanization plan; 8) develop modern agricultural industry; 9) encourage IT innovation.
We think investors will be happy to see the new leadership has fixed its reform objectives for the coming quarters, with significant new content.
One reform target announced is to allow domestic individual investors to invest overseas (called QDII2), consistent with previous comments from the former top securities regulator Guo Shuqing that QDII2 is under consideration. We believe the announcement reaffirmed that QDII2 preparations are in progress.
However, while this topic could attract attention, we believe the timeline for widespread adoption is still uncertain at the current stage. We do think trial programs could start this year if the target is to accelerate but don't expect nationwide implementation so fast.
We expect the government will launch trial programs, such as several provinces-Hong Kong stock through-train programs before nationwide implementation or broadening the investment scope to global. There could also be a filter to screen out qualified investors. Therefore, the amount of investment could be small and fundamental impact limited near term.
However, we believe this should over time develop to be larger in scale and boost sentiment. Beneficiaries include pure offshore listed reputable companies like China Mobile, CNOOC, Tencent and H shares trading at meaningful discounts to A-shares like metals and mining names.
Financing risks
The risk of local government vehicle financing may continue to be a focus of the central government, which may enhance control on total amount and risk of repayment, but with low possibility of inclusion in the fiscal budget system for local governments.
Strengthening regulation and monitoring will be the primary strategy. And it is possible that, to avoid large scale defaults, the central government may formulate and prepare an emergency aid framework, for coordinating among local government financing vehicles, banks and government agencies to control the spillover of risks.
Interest rate deregulation was re-emphasized and potentially hurts banks' net interest margin, but the process is gradual and in-line with our/market expectations, and containing local government financing risks may be modestly positive for banks' asset quality risks. Our banks' team's earnings forecasts already assume another interest deregulation move in the second half of 2013 (assume lifting of the float factor to 1.2 times from 1.1 times for deposit rates) that could lower net interest margin in 2014.
For exchange rates reform, it is likely that the government may widen the trading band of the yuan from 1 percent to 2 percent this year.
The article is written by Goldman Sachs (Asia) analysts Helen Zhu, Timothy Moe and Ben Bei as well as Beijing Gao Hua Securities analysts Jason Sun and Chenjie Liu. The opinions are their own.
The agendas identified are: 1) reduce administrative approval procedures; 2) reform the fiscal budgeting system; 3) gradually liberalize interest and exchange rates; 4) plan railway construction financing; 5) reform residential utilities pricing; 6) deepen healthcare reform; 7) improve urbanization quality, devise a longer-term urbanization plan; 8) develop modern agricultural industry; 9) encourage IT innovation.
We think investors will be happy to see the new leadership has fixed its reform objectives for the coming quarters, with significant new content.
One reform target announced is to allow domestic individual investors to invest overseas (called QDII2), consistent with previous comments from the former top securities regulator Guo Shuqing that QDII2 is under consideration. We believe the announcement reaffirmed that QDII2 preparations are in progress.
However, while this topic could attract attention, we believe the timeline for widespread adoption is still uncertain at the current stage. We do think trial programs could start this year if the target is to accelerate but don't expect nationwide implementation so fast.
We expect the government will launch trial programs, such as several provinces-Hong Kong stock through-train programs before nationwide implementation or broadening the investment scope to global. There could also be a filter to screen out qualified investors. Therefore, the amount of investment could be small and fundamental impact limited near term.
However, we believe this should over time develop to be larger in scale and boost sentiment. Beneficiaries include pure offshore listed reputable companies like China Mobile, CNOOC, Tencent and H shares trading at meaningful discounts to A-shares like metals and mining names.
Financing risks
The risk of local government vehicle financing may continue to be a focus of the central government, which may enhance control on total amount and risk of repayment, but with low possibility of inclusion in the fiscal budget system for local governments.
Strengthening regulation and monitoring will be the primary strategy. And it is possible that, to avoid large scale defaults, the central government may formulate and prepare an emergency aid framework, for coordinating among local government financing vehicles, banks and government agencies to control the spillover of risks.
Interest rate deregulation was re-emphasized and potentially hurts banks' net interest margin, but the process is gradual and in-line with our/market expectations, and containing local government financing risks may be modestly positive for banks' asset quality risks. Our banks' team's earnings forecasts already assume another interest deregulation move in the second half of 2013 (assume lifting of the float factor to 1.2 times from 1.1 times for deposit rates) that could lower net interest margin in 2014.
For exchange rates reform, it is likely that the government may widen the trading band of the yuan from 1 percent to 2 percent this year.
The article is written by Goldman Sachs (Asia) analysts Helen Zhu, Timothy Moe and Ben Bei as well as Beijing Gao Hua Securities analysts Jason Sun and Chenjie Liu. The opinions are their own.
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