Thursday, December 12, 2013, 08:31
Reforms to boost asset markets, experts say
By Emma Dai in Hong Kong

The reforms outlined in November’s Third Plenum are expected to benefit the regional asset market and provide opportunities to overseas investors, experts said at an investment conference organized by Credit Suisse in Hong Kong on Wednesday.

“The reforms are the deepest and most comprehensive ones in the past three decades. The plan will lead to structural transformations and benefit the country’s economy in the long term,” said Fan Cheuk-wan, Credit Suisse’s Asia Pacific chief investment officer.

The reforms of the fiscal system and urbanization drive and the relaxation of the one-child policy will pick up pace in 2014, Fan said, adding that related sectors will warm up in stock markets next year.

“At this point in time, the 12-month estimate of the price earnings ratios of companies in the Hang Seng China Enterprises Index has sunken to lower than 7 times. That means the market is yet to react to the reformative signals released by the Third Plenum,” she said. “However we believe the new leadership will firmly implement the reforms. Thus we are optimistic about China stocks and suggest investors go overweight on them.”

Other investment experts are less optimistic. Bruce Yam, forex strategist at Sun Hung Kai Forex Ltd, said the debts of local governments’ financing platforms, the potential risks of the shadow-banking system and overcapacity may weigh on growth expectations, limiting the pace of renminbi appreciation in the second half of 2014.

Hannah Li, senior securities analyst at Sun Hung Kai Financial Ltd, said that the issuance of preferred stocks, which was recently approved by authorities, could help boost banks’ balance sheets. But the overall increase in the banks’ capital base could intensify competition, resulting in the narrowing of interest margins, she said.

Fan said that more details on the reforms are expected after key meetings such as the Central Economic Work Conference, which started on Tuesday, and the National People’s Congress, which is scheduled for March 2014.

“The market is still skeptical and will continue adjusting for a while. But when more detailed rules are released, China stocks will see a rebound, especially in the Hong Kong stock market,” Fan added.

As fiscal and tax reforms proceed, the country will redistribute tax incomes between central and local governments more evenly, which is largely expected to ease the fiscal burdens of local governments. The newly released reform blueprint will also allow local governments to turn to the bond market for funding, giving them one more channel to add liquidity.

“Though the interest rate liberalization is due to trigger narrower interest margins, the effect of that and the expectations of more bad loans has already been absorbed by the market. In the future, we should only see the share prices of Chinese banks go upward.”

As the urbanization drive advances, restrictions on residency certificates, known as hukou, are expected to be relaxed in small and midsized cities.

“We expect hukou controls to relax gradually in the next five to 10 years, and that will fuel demand in service industries and infrastructure,” said Fan, adding that as some Chinese families will also be allowed to have a second child, more demand in the property sector is also foreseeable.

Also, as the country’s capital account is expected to open up, a move long-expected by overseas investors, and with the liberalization of the exchange rate mechanism, the renminbi is expected to appreciate.

Meanwhile, Fan said the domestic market is not going to see a strong rebound in the short term, as the recent resumption of IPOs will pressure it.

Grace Chai in Hong Kong contributed to this story.