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.
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.