Clerks assist customers inside a China Mobile Ltd service hall in Beijing Wednesday. China Mobile is one of the most popular mainland consumption stocks listed in Hong Kong. Nelson Ching / Bloomberg News

Economic trends and policy support are key factors

Investment bank Credit Suisse and HSBC Global Asset Management both said Thursday that they favor stocks related to rising consumption on the mainland as well as new energy, health care and financial equities. They cited policy support from the Central Government as a key factor.

The two banks stressed that these sectors will benefit from structural economic trends on the mainland including consumption growth, an increasing awareness of the need for more environmentally friendly growth and the process of funding source diversification.

At a press conference Thursday to promote Credit Suisse's new mainland strategy report, Head of China Research Vincent Chan stressed that the rising consumption theme is supported by government reforms, a high savings ratio and rapid urbanization.

"We expect the income distribution reforms, the provision of public housing and other social services will be the main theme of China's 12th Five-Year Plan due to be announced in October. The implementation of these reforms can unleash potential consumption growth on the mainland as people will be assured of the provision of a safety net that can induce them to spend more," he said.

Since the outbreak of the global financial crisis provoked by the collapse of Lehman Brothers in 2008, the mainland has been striving to shift from an export and fixed investment-led economy into consumption-oriented one.

Credit Suisse added that new energy stocks are also favored because the Central Government has promised to cut carbon dioxide emission per unit of gross domestic products in 2020 by 40 to 45 percent from the 2005 level. The investment bank also favored alternative energy operator stocks as they will benefit from rising investment in the "green" energy sector.

Credit Suisse said that as more than 80 percent of external funding for the Chinese economy comes from bank loans; it raises the need for funding source diversification through the capital market channel of corporate bonds and equities. Mainland insurance and securities companies could be the biggest beneficiaries of this.

Meanwhile, HSBC Global Asset Management said that the health care and certain resources sectors are poised for investment growth.

"We expect health care spending on the mainland will rise sevenfold between 2008 to 2018 in US dollar terms as the Central Government will unveil a public health care plan by 2015 and propose the construction of 2,000 new county level hospitals and other rural clinics," HSBC Global Asset Management Investment Director Mandy Chan said.

"We also expect property fixed-asset investment to grow at 10 to 15 percent compared with a year ago for the next two to three years, so we prefer the steel and cement sectors as these materials' prices will jump in the future," HSBC's Chan said.

She added that infrastructure stocks will also fare better because railway infrastructure spending on the mainland remained solid. Airline stocks will also be poised for investment growth because of the yuan appreciation trend, she said.

Mandy Chan stressed that the valuation of the mainland stock market is attractive, as the MSCI China index is currently trading at a 12 times price-to-earnings ratio.

For the next five years, Credit Suisse said that the mainland economy will grow 8 to 9 percent, retail sales will surge 17 to 18 percent, fixed-asset investments will rise 15 to 20 percent, and exports will jump about 10 percent.

China Daily

(HK Edition 09/10/2010 page3)