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Investors look to cheer major reform plan
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China’s mass consumer, healthcare and non-banking financial counters may well be the early winners in the country’s stock markets this week after Beijing promised the most sweeping economic and social reforms in nearly three decades.
Equity market investors are likely to cheer a plan to increase private ownership in state-owned enterprises, but the longer-term prognosis will likely vary across sectors.
The big losers could be the “big four” state banks, the Industrial and Commercial Bank of China, China Construction Bank, the Agricultural Bank of China and Bank of China. They are already feeling the pinch of interest rate liberalization and China’s leaders have promised to quickly reform the financial sector.
“In the near term, we believe market sentiment should be lifted by the detailed announcement of the Third Plenum released on Friday,” Goldman Sachs China equity strategists said in a client note referring to a four-day conclave of Communist Party leaders that set the reform agenda, promising “decisive” results by 2020.
The 60-point plan included land and residency reform to make it easier for rural Chinese to migrate to urban areas, a relaxation of the country’s one-child policy and allowing markets to play a greater role in the economy.
Stock markets in Hong Kong and China had rallied on Friday after an apparent leak of part of the plan circulated on social media. The China Enterprises Index of the top offshore Chinese listings in Hong Kong jumped 3 percent for its biggest percentage gain in three months.
This could continue since investors are underinvested in Chinese equities, analysts said. A Bank of America-Merrill Lynch survey showed that just 11 percent of emerging market funds had an “overweight” position on Chinese equities in November ahead of the Party meeting, down 45 percentage points from October. Since the reforms announced on Friday have helped dispel doubts about the reform credentials of President Xi Jinping, some of the funds could upgrade their view of the markets and filter money back in.
Investment into China-focused equity funds has been choppy in the last month, but data from global funds tracker EPFR showed there were net inflows in the week to November 13, despite market losses after the initial communiqué on the reforms released late on Tuesday had disappointed.
Still, much will depend on how the relevant ministries and government agencies follow through on executing the reform blueprint. That will provide clues on the urgency and priorities of the reform program, Goldman Sachs said.
The health ministry tempered expectations on Saturday that the relaxation of China’s one-child policy may eventually see restrictions lifted entirely. The reform plan increases the number of couples who can have a second child.
That uncertainty may temper gains for the Chinese dairy and baby goods sectors, whose sales could benefit from an increase in China’s birth rate. But for the economy as a whole, scholars and analysts say the change in the one-child policy is unlikely to do enough to reverse the shrinking labor pool or convince women to have more children as living costs rise.
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