China Intensifies Reforms to Push 2015 Growth - Analyst Blog
China’s benchmarks soared in 2014 and have maintained the winning momentum in 2015 too. In late 2014, the benchmark Shanghai Composite Index had moved above the 3K-mark for the first time in three years, braving many concerns. This year in March, China’s benchmark Shanghai Composite Index hit the best levels since May 2008, on expectations of more stimulus measures.
Chinese stocks recently gained the most in about four months as China’s policymakers declared the guidelines for reform priorities in 2015. Beijing is now keen to open up the country's capital markets.
Deepening Reform Plans for Crucial 2015
The reform guidelines were drafted by the National Development and Reform Commission. The State Council, the country’s cabinet, approved the guidelines, which calls 2015 “a crucial year for deepening reform”.
The statement noted: “More focus will be placed on promoting financial reforms to push forward the development of the real economy.” This highlights the capital market reforms that China has been serious about since last year. China’s reforms now range from streamlining administrative processes to focusing on the importance of boosting the yuan's role globally. The reforms look to further open up the financial sector to domestic and foreign investors.
The reforms highlight the Shenzhen-Hong Kong stock connect. In Nov 2014, trading link between Hong Kong and Shanghai was approved. The so-called Shanghai-Hong Kong Stock Connect program allowed retail investors around the globe to invest in mainland Chinese equities for the first time. It will likely result in more capital inflows into the country and certainly lift its dwindling economy.
The other reform areas targeted include “state enterprises, taxation, deposit rates, the initial public offering system, and boosting the global status of the yuan among others,” reported Reuters. Also, the country’s state-planning agency approved six rail projects that will see investments worth $39.3 billion.
Low Growth & Stimulus Measures
China’s markets may still move further up despite the strong gains already achieved. Investors have cheered three rate cuts since November and they look for more stimulus measures.
Stimulus measures are all the more necessary given that the economy is seeing slower growth. China’s economy expanded at its slowest pace in 24 years in 2014. The National Bureau of Statistics of China had reported first quarter GDP (preliminary estimate) to have registered 7% year-on-year growth.
However, some experts alleged that the actual growth was much worse. 7% growth in 2015 would be a multi-year low figure. Key bodies like the World Bank have also reduced China’s growth estimate for 2015.
Meanwhile, China’s political leadership has expressed satisfaction with a lower level of growth. The country seeks a path of slower but sustainable prosperity. China is making efforts to transform into a self-sustaining economy banking on domestic consumption. Employment and services have been attributed to be the bright spots, and slowdown is stabilizing according to Vice Premier Zhang Gaoli. Premier Li Keqiang had reassured that his government would take further steps to manage the economic situation.
However, the government has responded proactively to the series of dismal economic reports. In November, the People’s Bank of China (PBOC) announced its surprise decision to reduce interest rates. This was the first reduction in rates undertaken in more than two years. In next six months, there were 2 more rate cuts.
The government continues to undertake several reform measures targeted at specific sectors to boost growth. This includes increasing the pace of reforms of state-owned companies as well as relaxing property purchase and lending norms.
Stocks to Buy Now
The announcement of reform guidelines boosted Chinese stocks. Brokers, financial, railway stocks gained significantly. The positive reform guidelines and further stimulus measures will most likely drive markets upward. As the surge is expected to continue, investors may bet on the following stocks to enjoy potential gains.
Below we present 2 stocks that carry favorable Zacks Rank, has current year forward price to earnings ratio below 20, significant projected EPS growth and has seen price gains in recent months.
HollySys Automation Technologies, Ltd. HOLI is one of the leading automation systems providers in the People's Republic of China, developing a number of core technologies and completing numerous projects utilizing a wide array of automation products. Its customers include industrial, railway, subway, nuclear power, building retrofit, and mechanical and electronic industries.
HollySys Automation currently carries a Zacks Rank #2 (Buy) and has returned 6.3% year to date. After a downtrend from mid-Feb to mid-March, the stock has jumped about 49% since Mar 16. It carries a PE ratio of 15.39. The projected EPS growth is 17.4% as compared to industry average of 5.6%.
Huaneng Power International, Inc. HNP develops, constructs, owns and operates large power plants throughout China. It generates and sells electricity to regional grid companies in China and Singapore.
Huaneng Power International currently carries a Zacks Rank #2 (Buy) and has returned 3.8% year to date. After a downtrend from Feb to mid March, the stock has jumped over 27% since Mar 16. It carries a PE ratio of 8.4. The projected EPS growth is 32.7% as compared to industry average of 3.3%.
Meanwhile, popular names from varied industries such as JinkoSolar Holding Co., Ltd. JKS, insurance broker CNinsure Inc. CISG and Sinopec Shanghai Petrochemical Co. Ltd. SHI may also enjoy favorable trends. These stocks have gained 40%, 65.8% and 77.9% year to date. These three stocks carry a Zacks Rank #3 (Hold).
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