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.
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

Pakistan Among Developing Counties Hit Hard by Global Warming

Pakistani officials hope developed nations agree to scale back emissions, offer help in dealing with climate change

Video Speed, Social Media Shape Counterterrorism Probes

Speed is critical in effort to prevent subsequent attacks; demographics of extremists lend themselves to communicating, establishing profiles on digital platforms

Islamic State Oil Trade Seduces Friends, Foes Alike

Terrorist group rakes in up to $500 million a year in sales to customers such as Syrian government, US-supported rebels and Turkey

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Social Media Aids Counter-Terrorism Investigationsi
Katherine Gypson
December 01, 2015 10:06 PM
In the aftermath of the Paris attacks, officials carried out waves of raids and arrests to break up terror cells. As VOA's Katherine Gypson reports, social media can be a key tool for investigators.

Video Social Media Aids Counter-Terrorism Investigations

In the aftermath of the Paris attacks, officials carried out waves of raids and arrests to break up terror cells. As VOA's Katherine Gypson reports, social media can be a key tool for investigators.

Video Russia Marks World AIDS Day With Grim News

While HIV infection rates have steadied or even declined in many European countries, the caseload has grown rapidly in Russia, as VOA's Daniel Schearf reports from Moscow. Over half of the new infections were transmitted through injection drug use.

Video Pakistan Hit Hard by Global Warming

As world leaders meet in Paris to craft a new global agreement aimed at cutting climate-changing greenhouse-gas emissions, many developing countries are watching closely for the final results. While most developing nations contribute much less to global warming than developed countries, they often feel the effects to a disproportionate degree. As Saud Zafar reports from Karachi, one such nation is Pakistan. Aisha Khalid narrates his report.

Video With HIV, Can We Get to Zero?

The theme of this year's World AIDS Day is "Getting to Zero." The U.N. says new HIV infections have been reduced by 35 percent since 2000 and AIDS-related deaths are down by 42 percent since the peak in 2004. VOA's Carol Pearson takes a look at what it might take to actually have an AIDS-free generation.

Video Political Motives Seen Behind Cancelled Cambodian Water Festival

For the fourth time in the five years since more than 350 people were killed in a stampede at Cambodia’s annual water festival, authorities canceled the event this year. Officials blamed environmental reasons as the cause, but many see it as fallout from rising political tensions with a fresh wave of ruling party intimidation against the opposition. David Boyle and Kimlong Meng report from Phnom Penh.

Video African Circus Gives At-Risk Youth a 2nd Chance

Ethiopia hosted the first African Circus Arts Festival this past weekend with performers from seven different African countries. Most of the performers are youngsters coming form challenging backgrounds who say the circus gave them a second chance.

Video US Lawmakers Brace for End-of-Year Battles

U.S. lawmakers are returning to Washington for Congress’ final working weeks of the year. And, as VOA's Michael Bowman reports, a full slate of legislative business awaits them, from keeping the federal government open to resolving a battle with the White House over the admittance of Syrian refugees.

Video Taiwan Looks for Role in South China Sea Dispute

The Taiwanese government is one of several that claims territory in the hotly contested South China Sea, but Taipei has long been sidelined in the dispute, overshadowed by China. Now, as the Philippines challenges Beijing’s claims in an international court at The Hague, Taipei is looking to publicly assert its claims. VOA’s Bill Ide has more from Beijing.

Video After Terrorist Attacks, Support for Refugees Fades

The terrorists who killed and injured almost 500 people around Paris this month are mostly French or Belgian nationals. But at least two apparently took advantage of Europe’s migrant crisis to sneak into the region. The discovery has hardened views about legitimate refugees, including those fleeing the same extremist violence that hit the French capital. Lisa Bryant has this report for VOA from the Paris suburb of Cergy-Pontoise

Video Syrian Refugees in US Express Concern for Those Left Behind

Syrian immigrants in the United States are concerned about the negative tide of public opinion and the politicians who want to block a U.S. plan to accept 10,000 Syrian refugees. Zlatica Hoke reports many Americans are fighting to dispel suspicions linking refugees to terrorists.

Video Thais Send Security Concerns Down the River

As Thailand takes in the annual Loy Krathong festival, many ponder the country’s future and security. Steve Sandford reports from Chiang Mai.

Video Islamic State Unfazed by Losses in Iraq, Syria

Progress in the U.S.-led effort to beat Islamic State on its home turf in Iraq and Syria has led some to speculate the terror group may be growing desperate. But counterterror officials say that is not the case, and warn the recent spate of terror attacks is merely part of the group’s evolution. VOA National Security correspondent Jeff Seldin has more.

VOA Blogs