With valuation in global markets close to inflexion point, investors are looking for new markets to invest in. According to CIMB, the Chinese market would be your go-to market. Structural reforms, environmental-friendly policies and property policies are key investment themes that will drive valuations higher in the Chinese market.
3 Key Chinese Investment Themes By CIMB
40th Anniversary Of Reform: SOE Reform & Supply-Side Reform
Reform Of State-owned Enterprises
2018 marks the 40th anniversary of China’s ‘reform and opening-up policy, which led to China’s phenomenal economic growth over the next four decades.
According to CIMB’s analysis, state-owned enterprise (SOE) reform will be a focus in this round of reform. SOE reform has been implemented for almost 20 years since 1998’s big batch of privatisations. CIMB believes that this year’s key SOE reform themes will be mixed ownership, management incentive, lower leverage and consolidation.
Mixed ownership has the potential to enhance SOE’s management capability, efficiency and corporate governance as they learn from advanced private capital management experience. Leverage in Chinese corporation has been a main concern of global investors for many years. CIMB expects the leverage reform to moderate the rising pace of overall leverage ratio.
Another reform that the Chinese government has been working on in the past few years is supply-side reform. CIMB notes that this year’s supply-side reform will be shifting from capacity control in industries facing oversupply to bolster areas of weakness. CIMB foresees high-end manufacturing industries, such as semiconductors, electric vehicles and 5G equipment, to be key policy focus areas in 2018.
Environmental protection has risen to become one of the top priorities of the central government in the next few years. So far, the Chinese government has stepped up efforts to tackle pollution, especially in improving air quality. Key environmental targets have been laid out in the latest 13th Five Year Plan, where China wants to improve air quality, water quality, soil quality and reduce pollutant emissions.
Over the years, the government has strived hard to rein in property prices without much-sustained effect. In the past, structural elements have been underpinning property prices and reduce the effectiveness of government property tightening policies. These structural elements include the dependence of economic growth on the property sector, government fiscal income on land sales, the banking system on property value and differentiated right of property owners and tenants.
Moving forward, President Xi has called for making residential housing “for living in”. CIMB expects the Chinese government to push forward the establishment of a long-term property market in the following ways:
- Increase land supply
- Increase the supply of social housing, including economically affordable housing, low-rent housing and joint ownership housing
- Develop the housing rental market by protecting the rights of tenants and increase rental housing supply
- Roll out a property tax in a gradual manner
Investors Takeaway: Invest In MSCI China To Take Part In China’s Growth
With the three key investment themes providing fundamental support for the Chinese economy, CIMB recommends investing in MSCI China index to take part in China’s growth in 2018.
In spite of mild macro deceleration, CIMB estimates that MSCI China earnings growth can still reach 11.9 percent in 2018. Apart from the three investment themes, there are other fundamental factors supporting MSCI China’s share price.
Southbound inflow will continue thanks to the attractive price gap between China and Hong Kong shares, low domestic investors’ penetration to Hong Kong market, and strong Hong Kong market currently in a virtuous cycle for funds flow. Many global investors are still light on A-shares in their portfolio which may attract more funds inflow into Chinese equities. Moreover, MSCI China’s valuation is still reasonable compared to other markets, even after the recent re-rating.