China has excellent reasons behind its long-term drive to bolster the consumer sector. Among them are the need to reduce heavy reliance on fixed asset investment and exports to drive economic growth.
Now — with growth in the economy, fixed assets and exports all dropping – China’s push to increase consumer spending will do nothing but get stronger. And that results in a bright outlook for selected consumer stocks sectors.
That doesn’t mean an abrupt rise in government support for consumer spending, according to Andy Mantel, founder and CEO of Pacific Sun Investment Management and portfolio manager for Pacific Sun’s funds. “Investors have to be patient,” Mantel told Equities. “This isn’t an overnight process”
However, there are changes going on or on the horizon that will benefit some consumer company stocks.
Perhaps the biggest government policy for the consumer sector is the push for “social housing.” This drive to set up large amounts of low-cost housing both addresses dissatisfaction among middle-class Chinese shut out of the current high-priced housing market and bolsters the economy, and consumer stocks.
“This will support many industries,” Mantel said. “Helping people buy subsidized housing will help furniture companies, durables and others.”
A loosening of restrictions on travel and tourism will boost consumer spending. Among the recent moves to encourage travel was the government’s decision to add eight provinces to those allowing travel to Taiwan, Mantel said.
Among companies that will benefit, he said, is Cathay Pacific Airways (CPCAY), whose wholly owned subsidiary Dragon Airlines operates numerous flights in China.
One way to bulk up consumer spending is to encourage the use of credit cards. Mantel noted that in late December China allowed Bank of East Asia (China) to become the locally incorporated foreign bank to issue credit cards. The bank is the wholly owned subsidiary of the Bank of East Asia (BKEAY).
But not all consumer sectors stand to gain in the near term, Mantel said. Pacific Sun is short in Chinese lenders because of the growth in non-performing loans. It is also short on real estate developers in large urban areas where the government is still fighting a housing bubble.
Pacific Sun is launching a long-only fund, the Greater China Equities Fund, and is staying away from building materials companies, which “are not that cheap,” Mantel said. Food and agricultural companies – “not so much,” he said.
However, there is no doubt China will continue to launch measures to spur consumer spending. Mantel said there is talk the government well reactivate a rebate program for household appliances. Investors need to be ready to take advantage of new policies. End
Hong Kong Blue Chips: -226, -1.1%, to 21,757, 02-10-12, Hang Seng Index
Chinese Stocks in Hong Kong: -264, -2.3%, to 11,405, 02-10-12, HSCE Index
Shanghai Stocks: +0.1% to 2,352, 02-10-12, Shanghai Composite Index.
Chinese Stocks in the U.S.: +7.2, 412.1, 02-09-12, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips retreated from the key 21,000 level for the second time this week, spooked by a delay in implementation of a deal on Greece’s debt crisis. Worries about falling Chinese exports and profit-taking after a big run-up this year also dragged stocks down. Banks BOCOM (BCMXY) and CMB (CIHKY) fell on concerns about their need for fund raising. Solar energy plays plunged: GCL-POLY (GCLPY) -11.1%. However Lenovo (LNVGY) rose 3.5% on better-than-expected earnings. For the week the blue chip Hang Seng Index rose a scant 0.01%, and the index for Chinese companies fell 3.4%. KGI Research
Quotable: “The rise (in inflation) could be mainly explained by Chinese New Year falling on January this year, as opposed to being on February in 2011. As both weather and holiday factors are temporary, we expect the February headline figure to drop greatly to 4% or lower.” Haitong Securities. 2-10-12
Chinese Companies to watch: “The news about price increase(s) led the stocks in Oil and Natural gas gained a lot on Wednesday, but many of them slightly decline(d) yesterday. However, CNOOC (0883.HK) increased a forth day, gained 2.1%. We expect that the stocks which kept rising in the situation of market adjustment remain (with) a lot of potential in the future.” Haitong. 2-10-12
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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