Beneficiaries of reforms post 3rd Plenum
Comment of the Day

November 18 2013

Commentary by Eoin Treacy

Beneficiaries of reforms post 3rd Plenum

Thanks to a subscriber for this timely report by Jun Ma and colleagues at Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section

“The mega reform package approved by the 3rd Plenum, which includes 60 measures, is by far the most profound in a decade, if not decades, in terms of scope, depth, and impact. Its aggressiveness even exceeded our very bullish expectation. Emphasizing that the market would play a decisive role in allocating resources, this plan will guide China's second-half journey towards a market-based economy, significantly lift China's growth potential, and help reduce macro risks.

We believe that deregulation which will permit private companies to enter most industries other than those related to national security is the most important reform within the package. Our estimate shows that relative to the reform scenario, deregulation will boost the average annual real output growth of the private sector by 3ppts per year in the coming decade.

The measures to liberalize interest rates and the capital account, granting greater market access to foreign investors, granting farmers the titles of land use rights, as well as resource pricing reform will enhance the efficiency of resources allocation, and speed up the development the service sector. The development of the municipal bond market will help remove a major overhang on banks NPLs. The transfer of SOE shares to the pension fund and raising the SOE dividend payout ratio will help improve pension and fiscal sustainability in the longer run. The two-child policy will help raise long-term growth potential.

Eoin Treacy's view

My view – What can only be described as a lukewarm response to the initial announcement of policy ambitions following the plenary session of China's parliament turned to enthusiasm on Friday as some of the more ambitious objectives were revealed. These are now being hailed as the most extensive reforms in decades and are likely to prove a catalyst for investor interest in the stock market.

Two of the most important moves relate to the banking sector and the one child policy.

Proposals to accelerate reform of market rates, the currency markets and legislation for privately owned banks has helped fuel demand for financials. The FTSE A600 Banks Index rallied impressively from the region of the 200-day MA today, having found support last week in the region of the 200-day MA.

Hong Kong listed banks such as Bank of China (Est P/E 5.51, DY 5.95%) are among a small number of companies, globally, with yields greater than their P/Es. The share has been ranging above the 200-day MA since September and broke out today to reassert demand dominance.

Relaxation of the one child policy should be of benefit to the diaper and powdered mild sectors in particular. Hong Kong listed Hengan International is a Pan Asia Dividend Aristocrat and yields 1.83%. The share had been ranging with a mild upward bias between 2010 and May when it successfully broke above HK$60. The pace of the advance has picked up over the last six months and a break in the progression of higher reaction lows would be required to question medium-term scope for additional upside.


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