News / Asia

China Reform Winners Consumer, Healthcare Stocks; Losers, Big Banks

Investors look at computer screens in front of an electronic board showing stock information at a brokerage house in Hefei, Anhui province. Oct. 8, 2013.
Investors look at computer screens in front of an electronic board showing stock information at a brokerage house in Hefei, Anhui province. Oct. 8, 2013.
Reuters
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 well be the “big four” state banks, ICBC , China Construction Bank , Agricultural Bank of China and Bank Of China, which dominate formal lending. They are already feeling the pinch of interest rate liberalization and China's leaders have promised to accelerate financial sector reform.

“In the near term, we believe market sentiment should be lifted by the detailed announcement of the Third Plenum released Friday night,” 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 three 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 Communist 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 Nov. 13, despite market losses after the initial communiqué on the reforms released late on Tuesday had disappointed.

Follow through key

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.

China's health ministry tempered expectations on Saturday that the relaxation of China's one-child policy may eventually see restrictions lifted entirely, suggesting provinces may vary how quickly they implement the latest change. 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, some scholars and analysts say the change in the one-child policy is unlikely to do enough to reverse China's shrinking labor pool or convince many women to have more children as living costs rise.

Still, other consumer names, such as white goods retailers and food and beverage producers, will likely be lifted by plans to ease restrictions currently limiting the pace of rural-to-urban migration. Policymakers want to speed up the migration to bolster consumption and services, which they see as the future of the economy after years of investment- and export-led growth.

Limits on migration to China's biggest cities largely remain, suggesting policymakers are eager to spur growth to second-tier cities, especially as rising property prices in first-tier cities are a major concern for the central government.

The reforms pointed to an acceleration of property taxes at “the appropriate time”, but did not explicitly mention crimping property demand as a policy priority.

The lingering policy uncertainty could trigger a rotation out of outperformers in the Chinese property sector such as Country Garden and Shimao Property into larger rivals, whose share prices have lagged this year, such as China Overseas Land and China Resources Land .

Still, Beijing's move to make its urbanization policy more equitable for rural land owners will lead to an acceleration of farmland transfers in 2014 as smallholdings are consolidated, Jefferies analysts Jack Lu and Laban Yu said in a client note.

They said this should benefit agricultural machinery and high-tech farming sectors in the months ahead, such as First Tractor, Gansu Dunhuang Seed and Jiangsu Yangnong Chemical.

A plan to increase the dividends that state-owned enterprises pay to the state will likely be channeled to pay for the expansion of the social security system, analysts said. That could give a further boost to the pharmaceutical and healthcare sectors. China's healthcare sub-index has already risen 20 percent this year.

For state-owned enterprises, which dominate many economic sectors, the impact of the reforms was not clear, analysts said.

Fuel price reforms would encourage small competitors to loosen the state's grip on the energy sector, but giving markets more influence to price energy could mean rising prices, boosting earnings of the likes of state-owned Sinopec Corp and Petrochina .

Petrochina has already reported a 20 percent rise in third-quarter profit after Beijing hiked gas prices and allowed petrol and diesel pump prices to track international crude costs more closely.

Big banks

Interest rate liberalization has already narrowed net interest margins for the “big four” state banks and the squeeze looks set to tighten further. China's central bank governor pledged soon after the reforms were announced to “pull out all stops” to deepen financial sector reforms.

The introduction of private banks will increase competition for cash deposits and loan demand. A sub index of offshore Chinese financial listings in Hong Kong is down 4.5 percent so far this year, compared with a 1.4 percent loss for the MSCI China.

The banking sector is also vulnerable in the short term to a sharp rise in onshore money market rates amid a tightening of money supply. The central bank signaled earlier this month that it would rein in money supply growth.

On the other hand, non-banking financials, such as brokerages and insurers, will stand to gain from moves to deepen China's capital markets. The reforms included making it easier for firms to launch initial public offerings, which have been suspended in mainland markets for more than a year.

You May Like

Lesotho Faces New Round of Violence, Political Crisis

Brutal killing of military officer has sent former leaders back into S. Africa where they're watching anxiously as regional officials head in to try to restore peace More

Video US Diplomat Expects Adoption of Srebrenica Anniversary Resolution

Samantha Power says there's broad consensus about killings in Bosnia's war, but Russia calls resolution 'divisive,' backs countermeasure at UN More

UN Report Exposes Widespread Boko Haram Atrocities

Damning report graphically details pattern of vicious, widespread atrocities committed by Islamist militants More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Family of American Marine Calls for Release From Iranian Prisoni
X
Heather Murdock
July 01, 2015 8:59 PM
As the crowd of journalists covering the Iran talks swells, so too do the opportunities for media coverage.  Hoping to catch the attention of high-level diplomats, the family of American-Iranian marine Amir Hekmati is in Vienna, pleading for his release from an Iranian prison after nearly 4 years.  VOA’s Heather Murdock reports from Vienna.
Video

Video Family of American Marine Calls for Release From Iranian Prison

As the crowd of journalists covering the Iran talks swells, so too do the opportunities for media coverage.  Hoping to catch the attention of high-level diplomats, the family of American-Iranian marine Amir Hekmati is in Vienna, pleading for his release from an Iranian prison after nearly 4 years.  VOA’s Heather Murdock reports from Vienna.
Video

Video UK Holds Terror Drill as MPs Mull Tunisia Response

After pledging a tough response to last Friday’s terror attack in Tunisia, which came just days before the 10th anniversary of the bomb attacks on London’s transport network, British security services are shifting their focus to overseas counter-terror operations. VOA's Henry Ridgwell has more.
Video

Video Obama on Cuba: This is What Change Looks Like

President Barack Obama says the United States will soon reopen its embassy in Cuba for the first time since 1961, ending a half-century of isolation. VOA White House correspondent Luis Ramirez reports.
Video

Video Hate Groups Spread Influence Via Internet

Hate groups of various kinds are using the Internet for propaganda and recruitment, and a Jewish human rights organization that monitors these groups, the Simon Wiesenthal Center, says their influence is growing. The messages are different, but the calls to hatred or violence are similar. VOA's Mike O’Sullivan reports.
Video

Video US Silica Sand Mining Surge Worries Illinois Residents, Businesses

Increased domestic U.S. oil and gas production, thanks to advances known as “fracking,” has created a boom for other industries supporting that extraction. Demand for silica sand, used in fracking, could triple over the next five years. In the Midwest state of Illinois, people living near the mines are worried about how increased silica sand mining will affect their businesses and their health. VOA’s Kane Farabaugh has more in this first of a series of reports.
Video

Video Blind Somali Journalist Defies Odds in Mogadishu

Despite improving security in the last few years, Somalia remains one of the most dangerous countries to be a journalist – even more so for someone who cannot see. Abdulaziz Billow has the story of journalist Abdifatah Hassan Kalgacal, who has been reporting from the Somali capital for the last decade despite being blind.
Video

Video Texas Defies Same-Sex Marriage Ruling

Texas state officials have criticized the US Supreme Court decision giving same-sex couples the right to marry nationwide. The attorney general of Texas says last week's decision did not overrule constitutional "rights of religious liberty," and therefore officials performing wedding services can refuse to perform them for same-sex couples if it is against their religious beliefs. Zlatica Hoke reports on the controversy.
Video

Video Rabbi Hits Road to Heal Jewish-Muslim Relations in France

France is on high alert after last week's terrorist attack near the city Lyon, just six months after deadly Paris shootings. The attack have added new tensions to relations between French Jews and Muslims. France’s Jewish and Muslim communities also share a common heritage, though, and as far as one French rabbi is concerned, they are destined to be friends. From the Paris suburb of La Courneuve, Lisa Bryant reports about Rabbi Michel Serfaty and his friendship bus.
Video

Video Saudi Leaks Expose ‘Checkbook Diplomacy’ In Battle With Iran

Saudi Arabia’s willingness to wield its oil money on the global diplomatic stage appears to have been laid bare, after the website WikiLeaks published tens of thousands of leaked cables from Riyadh’s Ministry of Foreign Affairs. VOA's Henry Ridgwell reports.
Video

Video Nubians in Kenya Face Land Challenges

East Africa's ethnic Nubians have a rich cultural history that dates back thousands of years, but in Kenya they are facing hardships, including the loss of lands they have lived on for generations. They say the government has reneged on its pledge to award them title deeds for the plots. VOA's Lenny Ruvaga reports.
Video

Video Military Experts Question New Russian Tank Capabilities

Russia has been showing off its new tank design – the Armata T-14. Designers claim it is 20 years ahead of current Western designs - and driving it feels like playing a computer game. But military analysts question those assertions, and warn the cost could be too heavy a burden for Russia’s struggling economy. Henry Ridgwell reports.
Video

Video In Kenya, Police Said to Shoot First, Ask Questions Later

An organization that documents torture and extrajudicial killings says Kenyan police were responsible for 1,252 shooting deaths in five cities, including Nairobi, between 2009 and 2014, representing 67 percent of all gun deaths in the areas reviewed. Gabe Joselow has more from Nairobi.

VOA Blogs