Analyst: Reforms No Boon to China Stocks in 2013

Gene Linn |

With China stocks taking a breather Thursday after yesterday’s huge rise, many investors look to implementation of economic reforms by new Chinese leaders to bolster sustained gains in 2013. But BOCOM International, in its China Market Strategy Report, says, “Be careful what you wish for.”

Hong Kong’s Hang Seng Index edged 0.1% lower to 22,250 in slower turnover, and the index of Chinese companies rose 0.3% to 10,865. A prediction by the Chinese Academy of Social Sciences that GDP growth would rise from 7.7% this year to 8.2% in 2013 had helped the Hang Seng soar 2.2% the day before.

Many in the market base hopes for a longer term rally on the belief new leaders put in place last month will launch badly needed new reforms to stimulate an economy that has seen growth decline for seven quarters.

No doubt reforms are fundamental reasons for China’s growth. Just 35 years ago China endured a moribund centrally planned economy with banks that were merely an arm of the Finance Ministry and big enterprises that provided guaranteed employment, housing and hospitals for their workers. Now China has stock markets and billionaires, but there is still ample room for reforms. For example, huge funds shoveled to major state-owned enterprises can be more productively used by private companies.

But even if new leaders do manage to push through major reforms, China stocks may not necessarily benefit. BOCOM International noted that past “fundamental breakthroughs“ such as China’s entry into the WTO in 2001 “have not been particularly kind to the Chinese (stock) market.

“It is precisely because we believe in a fundamental reform that we are less confident than our peers regarding the reform’s market impact in 2013.”

However, there is still room for optimism, according the BOCOM International, the brokerage arm of China’s Bank of Communications. Two major reasons for a positive outlook are the gradual expansion of the economy and a shift to emphasis on consumption brought about by an aging population and government policy.

The brokerage is actually bullish on Hong Kong’s role as the gateway for China stocks: “With no capital flow restrictions, cheap valuation and an undervalued HK Dollar, Hong Kong could again be a magnet of global liquidity in 2013, and a better China investment proxy.” End

DAILY FIX

Hong Kong Blue Chips: -21, -0.1%, to 22,250, 12-6-12, Hang Seng Index

Chinese Stocks in Hong Kong: +35, +0.3%, to 10,865, 12-6-12, HSCE Index

Shanghai Stocks: -3, -0.1% to 2,029, 12-6-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: +5.4, 382.4, 12-5-12, Bank of New York Mellon, ADR Index-China - closed by storm

Insight: Hong Kong opened with gains following a rally on Wall Street, but profit-taking after Wednesday's big rise pushed blue chips to a small loss. The Chinese government's growing emphasis on urbanization helped properties close higher: China Resources Land (CRBJY) +1.7%. KGI Research

Quotable: "The improved sentiment may last for a while longer." BOCOM International. 12-6-12

Chinese Company to Watch: Cement producer Anhui Conch (AHCHY) "Since the rebound in construction and real estate markets will be lasting to the 2013, with the scale advantage and reasonable layout in domestic market, Conch may experience great growth in operation results in the future." Phillip Securities. 12-5-12

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
PVG:CA Pretium Resources Inc. 12.67 0.40 3.26 498,458

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