China reform winners consumer, healthcare stocks; losers, big banks


(Corrects reference in paragraph eight to EPFR)

By Clement Tan

HONG KONG, Nov 17 (Reuters) - China's mass consumer,healthcare and non-banking financial counters may well be theearly winners in the country's stock markets this week afterBeijing promised the most sweeping economic and social reformsin nearly three decades.

Equity market investors are likely to cheer a plan toincrease private ownership in state-owned enterprises, but thelonger-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 formallending. They are already feeling the pinch of interest rateliberalisation and China's leaders have promised to acceleratefinancial sector reform.

"In the near term, we believe market sentiment should belifted by the detailed announcement of the Third Plenum releasedFriday night," Goldman Sachs China equity strategists said in aclient note referring to a four-day conclave of Communist Partyleaders that set the reform agenda, promising "decisive" resultsby 2020.

The 60-point plan included land and residency reform to makeit easier for rural Chinese to migrate to urban areas, arelaxation of the country's one-child policy and allowingmarkets to play a greater role in the economy.

Stock markets in Hong Kong and China had rallied on Fridayafter an apparent leak of part of the plan circulated on socialmedia. The China Enterprises Index of the top offshoreChinese listings in Hong Kong jumped 3 percent for its biggestpercentage gain in three months. [ID: nL4N0J014E]

This could continue since investors are underinvested inChinese equities, analysts said. A Bank of America-Merrill Lynchsurvey showed that just 11 percent of emerging market funds hadan "overweight" position on Chinese equities in November aheadof the Communist Party meeting, down 45 percentage points fromOctober. Since the reforms announced on Friday have helpeddispel doubts about the reform credentials of President XiJinping, some of the funds could upgrade their view of themarkets and filter money back in.

Investment into China-focused equity funds has been choppyin the last month, but data from global funds tracker EPFRshowed there were net inflows in the week to Nov. 13, despitemarket losses after the initial communiqué on the reformsreleased late on Tuesday had disappointed.


Still, much will depend on how the relevant ministries andgovernment agencies follow through on executing the reformblueprint. That will provide clues on the urgency and prioritiesof the reform programme, Goldman Sachs said.

China's health ministry tempered expectations on Saturdaythat the relaxation of China's one-child policy may eventuallysee restrictions lifted entirely, suggesting provinces may varyhow quickly they implement the latest change. The reform planincreases the number of couples who can have a second child.[ID: nL4N0J1051]

That uncertainty may temper gains for the Chinese dairy andbaby goods sectors, whose sales could benefit from an increasein China's birth rate. But for the economy as a whole, somescholars and analysts say the change in the one-child policy isunlikely to do enough to reverse China's shrinking labour poolor convince many women to have more children as living costsrise.

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

Limits on migration to China's biggest cities largelyremain, suggesting policymakers are eager to spur growth tosecond-tier cities, especially as rising property prices infirst-tier cities are a major concern for the centralgovernment.

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

The lingering policy uncertainty could trigger a rotationout of outperformers in the Chinese property sector such asCountry Garden and Shimao Property intolarger rivals, whose share prices have lagged this year, such asChina Overseas Land and China Resources Land.

Still, Beijing's move to make its urbanisation policy moreequitable for rural land owners will lead to an acceleration offarmland 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 andhigh-tech farming sectors in the months ahead, such as FirstTractor, Gansu Dunhuang Seed and JiangsuYangnong Chemical.

A plan to increase the dividends that state-ownedenterprises pay to the state will likely be channelled to payfor the expansion of the social security system, analysts said.That could give a further boost to the pharmaceutical andhealthcare sectors. China's healthcare sub-index hasalready risen 20 percent this year.

For state-owned enterprises, which dominate many economicsectors, the impact of the reforms were not clear, analystssaid.

Fuel price reforms would encourage small competitors toloosen the state's grip on the energy sector, but giving marketsmore 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 inthird-quarter profit after Beijing hiked gas prices and allowedpetrol and diesel pump prices to track international crude costsmore closely. [ID: nL4N0J00PT]


Interest rate liberalisation has already narrowed netinterest margins for the "big four" state banks and the squeezelooks set to tighten further. China's central bank governorpledged soon after the reforms were announced to "pull out allstops" to deepen financial sector reforms.

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

The banking sector is also vulnerable in the short term to asharp rise in onshore money market rates amid a tightening ofmoney supply. The central bank signalled earlier this month thatit would rein in money supply growth.

On the other hand, non-banking financials, such asbrokerages and insurers, will stand to gain from moves to deepenChina's capital markets. The reforms included making it easierfor firms to launch initial public offerings, which have beensuspended in mainland markets for more than a year. (Editing by Neil Fullick)

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